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Fed Cuts Rates Less Than Expected: BMO Economics

With home price declines still roiling the economy and credit markets, the U.S. recession is poised to deepen further, according to a commentary by Michael Gregory, Senior Economist, BMO Capital Markets. Gregory's comments followed the decision by the U.S. Federal Open Market Committee (FOMC) to reduce the fed funds target rate 75 bps to 2.25 per cent.

“The market was leaning a bit more to a full percentage point paring, so this is a more hawkish outcome than expected,” according to Gregory. This less aggressive approach to easing going forward is signalled on three fronts:

Today's move, combined with prior actions to foster liquidity, have clearly mitigated some of the downside risks in the Fed's mind.
The Fed's reference to price stability indicates heightened concern about stubborn inflation. Previously, actions were directed solely to addressing downside risks.
There were two dissenting votes favouring less aggressive action, one more than in January's meeting.

“As long as this situation persists, the FOMC will have a bias to cut rates,” said Gregory. “However, the Fed seems to be signalling a more measured approach to easing for the time being.”

The full commentary can be found on the BMO Capital Markets Economics website at www.bmocm.com/economics.

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