The Open Market Committee of the Federal Reserve this afternoon (Dec. 11) cut its benchmark federal funds rate and its discount rate by 25 basis points each, to 4.25% and 4.75% respectively. The news, even though it was expected, sent equity markets reeling, as traders voted with their feet and initiated a 200-point sell off in the Dow Jones Industrial Average. Investors were expecting a 50-basis-point cut in the discount rate, the interest rate charged banks that borrow directly from the Fed, which would inject liquidity into still-tight credit markets.
Hope on Wall Street was that the Fed would act more aggressively as evidence mounts that the country is either already in or facing a recession early next year. Only one Fed Governor, Eric S. Rosengren, voted to drop the federal funds rate by 50 basis points.
In a statement announcing the rate cuts, the FOMC said, "Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time."
It also said, "Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation."
Parsers of Fedspeak saw the phrasing that "economic growth is slowing" as a tacit admission that the Fed can no longer say it is working to stave off a slowdown, which is already here. Its statement also reflected its continuing concern with inflation, saying, "Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully."
The statement concluded with the usual assurance that the Fed "will continue to assess" the effects of its policy, but it did not indicate that more rate cuts could be in the offing.
Builder stocks dropped sharply on the news, with the S&P Home Builders Exchange Traded Fund dipping more than 6% immediately after the Fed announcement and individual company shares falling between 5% and 10%.