The Federal Reserve on Wednesday lowered its federal funds rate by a quarter-percentage point to 4.5 percent, wrapping up a two-day meeting that had investors on their toes. As expected, it reduced the rate banks charge one another on overnight loans while also chopping a similar amount off the discount lending rate it offers banks directly.
While noting solid growth in the current economy and lessening strain in financial markets, the Fed's closely watched post-meeting statement was both gloomy on the way forward and coy about future rate reductions.
Predicting that "the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction," policymakers said the latest cut, coupled with a half-percentage-point cut on September 18, "should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time."
That doesn't, however, mean more reductions are on the way. The Fed now says that "the upside risks to inflation roughly balance the downside risks to growth" and acknowledged that surging oil and commodity prices could increase price pressures in the future.
In the end, worries about the housing bust and wobbly financial markets remain, but investors looking for a hint that Fed Chairman Ben Bernanke will offer even cheaper money in the future were roundly disappointed.
"In other words, unless the incoming data signal a net increase in downside growth risk, they think they're done. Inflation worries...just won't go away," wrote Ian Shepherdson, chief U.S. economist at High Frequency Economics.
Markets hoping for more rate relief sold off hard after the statement but rebounded almost immediately to resume an earlier rally sparked by the morning's healthy economic data, including a hefty 3.9 percent gain in third-quarter growth in gross domestic product.
