As expected, the Federal Reserve cut interest rates another 25 bp to 2%. This put the Fed funds rate at its lowest level in almost four years.
The language released after the interest rate cut, however, was not exactly what the Dollar bulls wanted to hear. Prior to the release of the meeting's results, the foreign exchange markets were looking for a stronger indication that the Fed was through cutting rates for the year. This would have sent a signal to global traders that the Fed had successfully stabilized the U.S. economy and prevented it from falling into a recession.
While some analysts believe that the statement was neutral and that rates would stay at 2% for a long time, the real bets were placed against the Dollar as all major currencies posted gains by the end of the day. These traders believed that the Fed was leaving the door open to further rate cuts as the Fed said it stood ready to act as needed to promote economic growth and stability.
This key quote was interpreted by some to indicate that the Fed knows it is going to have to fight a battle between stimulating the economy without fueling inflation. At this time the Fed is getting tugged into two directions. Faced with a deteriorating housing market, low consumer confidence and a weak job market, the Fed must now concentrate on finding the delicate balance between turning the economy around without easing credit so much as to make inflation worse.
Unlike its counterpart, the ECB, which recently voted unanimously to hold interest rates steady at 4%, the Fed had two dissenters of its decision to lower rates. Richard Fisher, president of the Dallas regional Fed bank, and Charles Plosser, head of the Philadelphia Fed, argued against lowering rates. This indicates that the data the Fed has been analyzing may be showing two different sides of the economy.
One side of the Fed camp seems to be focusing its efforts on getting the housing and job markets moving forward as a means of boosting consumer confidence. The other side is looking at stabilizing energy and food prices to benefit the consumer. Both seem to agree that consumer spending is going to be the key. A consumer happy with the value of his home and job security is more likely to spend this country out of a recession. On the other hand, forcing gasoline and food prices down to more acceptable levels would also give consumers an opportunity to spend their money in other areas.
Euro traders appear to be coming to the conclusion that the Fed is caught in the middle with no clear indication that rates are going to stabilize over the rest of the year. On the other hand, the ECB is on record as saying that it will do all it can to knock down inflation. The only conclusion one can arrive at is that the Euro is still the stronger of the two currencies.
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