The Open Market Committee of the Federal Reserve decided today to cut its target federal funds rate by 25 basis points to 2%, bringing the total cuts in the rate during the past seven months by 3.25 percentage points. It also cut its discount rate by a quarter point to 2.25%.
In its statement, the FOMC said, "The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity." However, it also stated, "...uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully."
Analysts took that to mean that there would be no further rate cuts in the immediate future.
The Fed action came after a morning report on Gross Domestic Product from the Commerce Department that estimated the economy grew at an anemic 0.6% during the first quarter, the same rate as fourth quarter, 2007. With many economists having projected that the economy had fallen into recession during the first quarter, the growth was unexpectedly high. However, some analysts attributed the increase to bloated inventories of goods that have remained unsold as consumer spending continued to drop. A recession is generally defined, in hindsight, as two consecutive quarters of negative growth in GDP, but economists have in recent years eased that standard to simply a significant widespread decline in economic activity.
The Fed acknowledged the state of the economy in its statement. "Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further.Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters."
On inflation, the FOMC said, "Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization."
The equity markets dropped on news of the Fed announcement, with the Dow losing nearly 200 points gained earlier in the session.