Wednesday, October 29, 2008

Fed Blows A Bit of Smoke and "Lowers" Fed Funds Rate 50 Basis Points to 1%

The Federal Open Market Committee said today that it lowered its target for the federal funds rate 50 basis points to 1 percent.

In a Keynesian twist to their statement, the Fed said that, '"the pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. "

In addition the Fed said that, "business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

The Fed also said that, "in light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability."

They did not mention the concern of many including yours truly and Warren Buffett that "the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts. "

Further, the Fed did not mention that they are basically blowing smoke with this announcement, since Fed Funds have been trading below 1% since October 16, and the Funds rate has a greatly dimnished and different role as a result of the Fed's paying interest on deposits at the Fed.

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