Fed Reduces the Fed Funds Rate, What's Next?

[ItalianFX]

The Federal Reserve just reported that they are cutting rates 25 basis points and cutting the discount rates the same. Now, I know the discount rate doesn't mean much in the broader scheme of things given that it is still higher than the fed funds rate, but now that we know of this cut, interest rates are going lower.

What can we expect from the dollar, stocks, bonds, commodities?

How do we look into it and react to it?

How does it affect the overall economy?

What does all of this mean and how do you interpret it?

I am an economics major and I am very interested in how these things work. I should probably know more than I do, but we never really do any real-world application.

Thanks.

[soko]

"Today’s action, combined with 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."

Sounds like the FED doesn't want to cut rates anymore after this one, what say you?

[Jimbo]

[ QUOTE ]
Sounds like the FED doesn't want to cut rates anymore after this one, what say you?


[/ QUOTE ]

I think they just don't want to be so predictable that they cause a meltdown in case they make a change percieved as somewhat unfavorable by wallstreet and the world economies in general.

Jimbo

[ItalianFX]

I also read something somewhere about how they want to remain flexible in case they want to take back their rate cuts.

[soko]

[ QUOTE ]
[ QUOTE ]
Sounds like the FED doesn't want to cut rates anymore after this one, what say you?


[/ QUOTE ]

I think they just don't want to be so predictable that they cause a meltdown in case they make a change percieved as somewhat unfavorable by wallstreet and the world economies in general.

Jimbo

[/ QUOTE ]

Well they had no problem being almost entirely transparent in the past 2 months. Would this sudden change mean something along the same lines that there should be less confidence they will cut rates again?

[CrushinFelt]

No rate cuts 'til at least '08

[ItalianFX]

At the extremes, what would happen to the economy if the Fed took the rates to 1% or too high, say 10%? Assume these rates happen within one Fed meeting, for example, if today, the Fed cut rates to 1% from 4.75% or moved them to 10%.

[DcifrThs]

[ QUOTE ]
At the extremes, what would happen to the economy if the Fed took the rates to 1% or too high, say 10%? Assume these rates happen within one Fed meeting, for example, if today, the Fed cut rates to 1% from 4.75% or moved them to 10%.

[/ QUOTE ]

the yield curve & stocks would be the first to react imo and they'd do so with vengence. it woudl itnroduce a ton of volatility in the short term and cause huge dislocations (more than already)

if they kept them that way and signalled it (i.e. did that huge move and then said "we're gunna stay at this for XYZ reasons" then in the cut case the long yields would probably push up a ton with a very steep yield curve while short rates came in obviously.

tips would rally and everybody piled in (not a ton of liquidity there so prices would really have to jump and yields fall) as expectations of future inflation came in (int he case of a cut). similarly, gold would rally & the dollar would clearly sellt he hell offa nd that might cause huge problems for CA financing which would likely cause apositively reinforced spiral of needing higher long rates to hold dollars and the lack of demand to hold them.

it would really cause some huge moves.

Barron

[Moonshine]

It sounds like the fed is getting really uncomfortable with the extent that markets seem to be essentially dictating the rate they need to move to. IE, markets have been heavily pricing in cuts and not following suit would cause unwanted disruption (in September I think, rate cut was priced in at 37%, if they only cut 25% then equities would have tanked along with a number of other things, exacerbating the credit crisis).

By saying they're concerned with inflation, they seem to be introducing an element of uncertainty into future decisions and reminding people that some volitility does still exist in the system. Further cuts would not make as much sense if inflation was a concern