The visible hand in economics

Fed cuts rates to 3.0%, GDP growth poor

Posted on: January 31, 2008

As the market expected the Fed cut its Federal Funds rate to 3.0% (down 50 basis points), a full 125 basis points lower than it was at the last meeting.  In the accompanying statement they touched on all the issues that they have previously complained about:  Weak housing market, softening labour market, and the erratic credit market.  The main issue for the Fed appears to be liquidity, as the idea of a financial accelerator comes into play.

They did also mention inflation they said that they expect it to moderate.  However, any upside shocks on the inflation front could cause concern for the Fed.

On the GDP side the market received a downside surprise, with a growth estimate for the December quarter of 0.6% (this is equivalent to approximately 0.15% quarterly, seasonally adjusted growth).  A poor turnout for residential investment and a strong de-stocking in inventories were the main driver of this easing in growth.  A good description of the data is given by Econbrowser.

What does this mean for New Zealand?  Well our dollar jumped half a cent against the US$ as the yield gap rose, we are now pushing $0.79US again.  The market didn’t seem terribly phased by the GDP figure, given underlying ‘strength’ in consumption and exports.  As a result, commodity prices should hold up at least a little longer 😉

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