Fed Drops Key Rate to 2 Percent; Signals Likely Pause Ahead

The Federal Reserve voted Wednesday, as expected, to cut the federal funds target rate 25 basis points to 2 percent; the cut was largely within investor expectations, leading Wall Street higher as the Dow Jones Industrial Average added slightly to earlier gains in Wednesday’s trading session. The latest cut comes as rising concerns about inflation have many expecting a pause to future rate cuts; the Fed has cut rates seven times since last summer, by a total of three percentage points. Also as expected, the Fed signaled that concern about inflation may lead it to pause on further rate cuts going ahead, saying that “uncertainty about the inflation outlook remains high.” Critics have recently contended that the Fed’s rate cuts did little to abate the mortgage and financial turmoil that has best global markets since last August, pointing instead to the Fed’s historic use of the discount window and liquidity programs as the real reason markets have calmed; some have also suggested that the Fed’s aggressive monetary policy stance has further weakened the U.S. dollar and helped create a global run-up in commodity prices that has led to rioting and food shortages in other countries, including Egypt. Balancing inflationary concerns with lagging economic activity has become the largest challenge for Ben Bernanke’s Fed as the credit crisis has rolled on, and pushed the U.S. into what many believe is already a nationwide recession. The Fed said that “economic activity remains weak,” and that the housing contraction was “deepening” and likely to “weigh on economic growth over the next few quarters.” The Fed’s decision didn’t come unanimously, with Richard Fisher, president of the Federal Reserve Bank of Dallas, and Charles Plosser, president of the Federal Reserve Bank of Philadelphia, voting for no change to the target rate. Plosser, in particular, has vocally argued against seeing rate cuts as a panacea for current economic ills. The full statement from the Federal Open Market Committee is available here.

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