Fed Cuts Benchmark Rate By 75 bps to 2.25%

The Fed has cut the main benchmark rate by 75 basis points from 3% to 2.25%, less than the 100 bp cut speculated by the financial markets. The vote wasn’t unanimous; there were two dissents for a smaller ease, coming from Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, who preferred “less aggressive action”. The Fed’s statement that it “will act in a timely manner as needed to promote sustainable economic growth and price stability” signals that the Fed stands ready to cut interest rates again. The FOMC statement states that the outlook for the US economy has weakened further, with similar worries about credit tightening, housing and labor as in the prior statement. The FOMC notes inflation has been elevated, with some indications of inflation expectations rising, though the committee still expects inflation to moderate in the coming quarters. The Fed also voted to lower the discount rate, the cost of direct loans from the central bank, to 2.5%.

“Recent information indicates that the outlook for economic activity has weakened further,” the Fed said. “Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.”
The US dollar slipped against the Japanese yen following the rate cut.