Yesterday afternoon, the Federal Open Market Committee did what nobody expected. The Fed lowers rate target. If you paid any attention to published reports, then they acknowledged what was already priced in by the futures markets and lowered its target for the federal funds rate by 50 basis points to 4.75%. While US equity markets reacted favorably to the news, with the Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 indices all up on the news today, it is unclear as to whether this is a sign of good things to come, as the equity market reaction seems to suggest, or merely an attempt to forestall an inevitable slowdown of the US economy. The Fed, for its part, couched its change as a response to the current troubles. They have hit the credit markets, in particular mortgage lending:

“Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action [intends] to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.”

FOMC Statement September 18, 2007

Fed Lowers Rate Target Conclusion

It certainly seems that the Fed is responding to pressure from the financial community. The financial community wants them to ease its monetary policy in the face of increasing difficulties in the credit markets. In addition, they want them to help those who recently financed their home purchase with an adjustable rate mortgage. Needless to say, this is probably not good news for the US dollar. As a result, the dollar continues to depreciate in value relative to other major currencies. After reading the FOMC statement, we realized there may be a rougher patch ahead.