Good Morning with 25 bps cut by Fed

The Federal Reserve cut the fed funds rate target 1/4% to 4 1/2%.  This move was widely expected.   The statement accompanying the announcement presented a balanced view as to the outlook, raising the possibility that there won't be any more rate cuts unless economic conditions worsen.

 

The summary paragraph of the statement said, "The Committee judges that, after this action the upside risks to inflation roughly balance the downside risks to growth."

 

The statement also said that "Today's action, combined with the the policy action taken in September, 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."

 

The Fed also noted that "recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation" and that "some inflation risks remain."  

 

The statement de-emphasizes the downside risks to the economy that was apparent in the previous statement and raises the possibility of a risk of inflationary pressures.  

 

The language in the statement implies that the Fed is communicating that further rate cuts are by no means certain.   In fact, if economic and inflation conditions remain as they are at present, the Fed is not likely to cut rates at its next meeting.   Of course, the Fed no more knows for certain what the future will bring, and if the housing market or the economy worsens appreciably, there may be more rate cuts.   But the Fed is also saying that there is a good chance that rates are back on hold.  

 

This will not change our moderately bullish view on the stock market.  Interest rates are low enough to create relative value for stocks, and we anticipate that even sluggish economic growth will produce moderate earnings growth the next few quarters.   More rate cuts would have been additionally bullish for the stock market, but are not required for the market to edge higher through year-end and into next year.

 

US markets have closed gaining more than 1% and asian markets have opened with a positive bias.