The visible hand in economics

Fed cuts rates to 4.25%

Posted on: December 12, 2007

The US Federal Reserve cut their cash rate and discount rate by 25 basis points. In the statement the Fed said the following about inflation:

“Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation … some inflation risks remain”

In regards to growth they said:

“Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.”

Taken together, this statement seems to have a relatively neutral tone. As financial markets felt 50 basis points of cuts would be required, a 25 basis point cut and a neutral statement have merely made markets nervous.

In dropping interest rates, the Fed has moved away from a situation where they will “only ease policy over our dead bodies“. However, by only cutting by 25 instead of 50 basis points, and keeping a neutral tone, they have stuck to a more responsible path regarding inflation.

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