Rate Cuts, Stimulus Package—and Another Rate Cut?
Key data released during the past few weeks reveal a serious slowdown in economic growth as 2007 was drawing to a close, and it’s  obvious that the economy entered 2008 in a seriously weakened condition.  On Jan. 10, Fed Chairman Ben Bernanke delivered a comprehensive speech during which he emphasized downside risks to the economy and said that “additional policy easing may well be necessary.”  Bernanke repeated those messages in testimony before the House Budget Committee on Jan. 17, and also said at that time that the Fed must remain exceptionally alert and flexible to counter any adverse dynamics that might emerge.  “Adverse dynamics” certainly emerged on Jan. 21 as futures and foreign stock markets tumbled. So early on Jan. 22, the Fed announced 75 basis point cuts to both the federal funds rate and the discount rate — to 3.50% and 4.00%, respectively.

The Fed presumably will enact additional cuts in short-term rates at its Jan. 30 meeting (NAHB is currently assuming half-point reductions), and further cuts are likely down the line. We’re looking for a 2.75% federal funds rate by the March 18 FOMC meeting, and even stronger monetary stimulus will be delivered if conditions warrant. The downshift in economic activity has captured the attention of Congress, the Administration and virtually all the Presidential candidates. On Jan. 18, President Bush voiced his support for a short-term fiscal stimulus package that would amount to about 1% of GDP, or roughly $150 billion. The President stressed that stimulus measures should include assistance for both households and businesses and he did not tie his support to extension of his 2001/2003 tax cuts.  With that big stumbling block out of the way, timely bipartisan agreement on a stimulus package may very well be reached in the near term. [ return to top ]