Fed Surprise

It’s

50bp, and it’s unanimous!

So much for prediction

markets. The half-point gap between the funds rate and the discount rate

remains, but with the discount rate now at 5.25%, it’s definitely more attractive

to banks facing liquidity problems. The Fed’s statement explicitly says that

it’s cutting in response to financial, as opposed to real-world, developments:

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.

Are central banks becoming pushovers? First the UK government decides to guarantee

all the deposits at Northern Rock, now this. Still, it’s probably good for the

central bank to be at least a little bit ahead of the curve. A 25bp cut would

have meant that everybody expected another cut at the next meeting; after this,

however, and with the language about inflation risks remaining, we might be

stuck at 4.75% for a while.

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