Fed Cuts Federal Funds Rate by .25%

The Fed today decided to cut the Federal Funds rate and the Discount rate by .25%. This is less than what many on the Street hoped and wanted but the Fed understands that inflation pressure is bubbling away.

Here's the full text of the Fed's Policy statement. I've highlighted the areas I think are interesting:

Release Date: December 11, 2007

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis.

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Clearly, Bernanke and Co. are not looking just at core inflation, which is not an accurate indicator of inflationary pressure. Core inflation doesn't monitor changes in energy, food, or commodity prices - the very things which are hitting consumers especially hard. See my article on real inflation for more on this.

In addition, the Fed needs to be concerned about further drops in the dollar. If the US keeps cutting rates, the dollar will continue to come under tremendous pressure.

The Fed is now caught between the deflation of the housing bubble and the rise in commodity and energy prices. If the economy continues to slow, can you say stagflation?