Economists react to latest Fed rate cut

As so thoughtfully compiled by The Wall Street Journal:

We anticipate that Bernanke and his FOMC will continue with an aggressive course of rate cutting in order to boost economic growth. It’s looking less certain, however, that Fed action will be able to help the economy avert a recession. Think of the situation like this: the Fed is in a footrace with the economy, but their goal isn’t to win, it’s to tie. When the two racers are in step, the Fed can move and cut rates at a steady pace, so long as the decline in economic growth remains consistent with expectations. With recent volatility, however, the Fed has been forced to take aggressive action and, given the deterioration in economic conditions, further aggressive action seems likely. –Guy LeBas, Janney Montgomery Scott

A clear shift away from Greenspan era gradualism. Moreover, this sizable correction toward near-zero real (i.e., inflation adjusted) interest rates comes prior to conclusive evidence of the start of a recession… We expect to see a continuation of weak economic indicators in the remainder of the first quarter of 2008, leading to another cut in the Fed funds rate at the FOMC’s next scheduled meeting on March 18.–PNC

The hint here is that they think further easing will be much slower — markets permitting. –Ian Shepherdson, High Frequency Economics

This aggressive action suggests that, once inflation returns as a concern for this Committee, rate hikes could come more quickly than we have seen in the past. –Drew Matus, Lehman Brothers

Whether this more aggressive approach to monetary easing will prove sufficient to keep the economy out of recession is difficult to say, particularly given that monetary policy operates with long and variable lags and the credit crunch and the housing correction have yet to run their course. Much will depend on the health of the labor market and the ability of consumers to grow spending at a pace sufficient to offset weakness elsewhere in the economy. –Joshua Shapiro, MFR, Inc.

What happens next? This may not be the last move on the part of the Fed, but it will take additional very soft economic data to get more action. The key will be the jobs situation. The FOMC noted that there was “some softening in the labor markets”. We get the January employment report on Friday so we will see if that deterioration has continued. Before the next FOMC meeting on March 18th, we will also have seen the February jobs data as well as enough economic numbers to get a picture of first quarter growth. If those numbers are soft, look for another cut. However, I have consistently argued that we could skirt a recession and a 3.00% funds rate could be low enough to get the job done. –Naroff Economic Advisors

While the Fed certainly left the door open for further action, the policy assessment did seem to tilt toward reigning in expectations of significant additional action… We continue to look for the fed funds target to reach a trough of 2.50% during the first half of 2008. Moreover, the aggressiveness of the Fed’s response to date — together with pending fiscal stimulus, lower energy prices, and a likely surge in mortgage refinancing activity — reinforces our call for a rebound in economic activity during the second half of the year. –David Greenlaw, Morgan Stanley

The Fed can continue to cut rates with the expectation that domestic demand for goods and services will be modest and that core inflation should ease later this year. The risk to that assumption is that a decline in demand for services will be concomitantly with a fall in demand for commodities and energy. Thus, the risk that the committee is implicitly accepting is that inflation will cool along with global demand for basic inputs. Should this occur, the reflation gambit on the part of the Fed may succeed in stabilizing the economy. Should inflation not decline in an expected fashion or should output bounce back earlier than anticipated, then we may see the Fed begin to withdraw liquidity sooner than may be optimal for an economy recovering from both a financial and energy shock. Either way 2008 will be a very mean year for the FOMC. –Joseph Brusuelas, IDEAglobal

The FOMC may well cut the funds rate further, it’s more significant steps (and those of foreign central banks as well) will be directed towards keeping global credit markets functioning amidst the continuing fallout from the mortgage-backed mess that has yet to run its course. This is clearly a more daunting challenge and until confidence is restored along this front, lower interest rates are likely to be of limited effectiveness. –Richard F. Moody, Mission Residential

Compiled by Phil Izzo