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Fed Cuts Interest Rate a Quarter Point, Not Enough Says Dr. Joe Webb

Thursday, June 26, 2003

Press release from the issuing company

June 26, 2003 -- The Federal Open Market Committee decided today to lower its target for the federal funds rate by 25 basis points to 1 percent. In a related action, the Board of Governors approved a 25 basis point reduction in the discount rate to 2 percent. The Committee continues to believe that an accommodative stance of monetary policy, coupled with still robust underlying growth in productivity, is providing important ongoing support to economic activity. Recent signs point to a firming in spending, markedly improved financial conditions, and labor and product markets that are stabilizing. The economy, nonetheless, has yet to exhibit sustainable growth. With inflationary expectations subdued, the Committee judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time. The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome substantial fall in inflation exceeds that of a pickup in inflation from its already low level. On balance, the Committee believes that the latter concern is likely to predominate for the foreseeable future. ==== Free WTT Analysis: Below is a quick take on this news from Dr. Joe Webb. Premium Access Members can view more analysis in his weekly column on Friday, appropriately called “Fridays with Dr. Joe”. "They teased us. The Fed gave us just a quarter point when we need more, and have needed it for a while. Perhaps they were concerned that the upcoming child care credit tax rebates as well as the new federal tax withholding rates would throw too much cash around in the economy, creating a chance of inflation again. Remember that inflation is too much money chasing too few goods.  With the productivity levels of business and their cutbacks in staff and spending, there is little chance of that occurring. But in their statement they seem to imply that this rate cut has slayed the deflation dragon and the inflation monster is what we have to watch out for. In my mind, chances are better than 50-50 that they will have to cut again three to six months from now."




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