Fed’s Comments Don’t Signal Negative GDP

The FOMC decision on interest rates was due at 2:15 PM EST, and we got a rate cut decision a tad late today  A cut was already expected and the only real variable was whether this would be a token 25 basis-point cut or if it would be a much deeper cut of 50 basis-points or more. 

The Fed Funds rate has been cut by 50 basis- points to 1.00% from 1.50%.  The FOMC has also cut the discount rate by 50 basis-points to 1.25% from 1.75%.  The actual comments from the decision posted is where the real meat is.

You can read the full statement here or here are some of the excerpts from Ben Bernanke and friends:

• decline in consumer expenditures
• business equipment spending weakened
• industrial production have weakened
• downside risks to growth remain
• intensification of financial market turmoil is likely to exert additional restraint on spending
• recent actions should help over time to improve credit conditions and promote a return to moderate economic growth

Here was a snapshot of the markets at 2:02 PM EST before the decision was out:

DJIA                   9143.89 (+78.77; +0.87%)
S&P500            949.32 (+8.81; +0.94%)
NASDAQ           1668.91 (+19.44; +1.18%)
10YR T-Note    3.805% (-0.015%)

Frankly, with all of the infusions, a prior rate cut, the TARP bailout, the incentives, and the forgiveness, this rate cut seems a bit like an afterthought today. 

There is one key statement inside the entire statement that is very important and it may signal that the preliminary Q3 GDP number tomorrow might not be a negative number like economists are expecting:  downside risks to growth remain.  Here is the issue, if the FOMC is still calling this as "risks to growth" then you might want to consider that the Fed already has seen this data on the preliminary Q3 GDP and this increases the chances that the actual number won’t be in negative territory in that preliminary report.

Jon C. Ogg
October 29, 2008