The FOMC in September: Preemptively Easing

September 18, 2007 – The FOMC voted today to reduce its target Fed funds rate by 50 basis points to 4.75% (Chart 1). Before today, the Fed funds target had been unchanged at 5.25% for 14 straight months.

Chart 1. The nominal and real target Fed funds rate. January 1987 to date.

According to the FOMC’s post-meeting press release, “Economic growth was moderate during the first half of the year…” That’s unchanged from the FOMC’s August statements.

However, “the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.”

Thus, today’s easing action was intended specifically to grease the wheels of the credit markets. It is not a tacit acknowledgement of any serious deterioration in real economic conditions. Instead, in the FOMC majority’s view, it is a preemptive move to safeguard future economic growth.

On the inflation front, the FOMC continues to see evidence of a modest improvement this year. But, it judges that “some inflation risks remain”. And so, it “will continue to monitor inflation developments carefully”.

As far as the outlook for U.S. monetary policy is concerned, the FOMC isn’t making any commitments. “Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Suzanne Rizzo