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Translating the Fed

What the Fed said: a translation

The Federal Reserve took the rare step of cutting interest rates between regularly scheduled meetings when it slashed the federal funds rate today by three-quarters of a point.

The action comes just a week before the central bank's regularly scheduled meetings Jan. 29 and Jan. 30. The Fed issued a statement explaining its action. As usual, it's not the easiest thing in the world to understand. Here's a translation of what the Fed said in regular English.

What the Fed said What the Fed meant
FED: The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent. Translation: The Federal Reserve's rate-setting Federal Open Market Committee has dropped its target for the federal funds rate by three-quarters of a percentage point, to 3.5 percent.
FED: The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets. Translation: The rate-setting committee cut the federal funds rate because it appears increasingly likely that the economy will fall into recession. Banks and companies have had trouble getting short-term loans, and while that situation has improved a bit, it's becoming harder for some businesses and individuals to get approved for longer-term credit at decent rates and terms. Home sales and prices are down, housing construction is falling, and the unemployment rate is rising.
FED: The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully. Translation: Inflation probably will settle down over the next few months, but that situation bears watching.
FED: Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks. Translation: The economy could continue to slow, and that bears watching, too. The Fed will act swiftly -- possibly by cutting short-term rates again -- if necessary. For the Fed's next move, a rate reduction is more likely than an increase.
FED: Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh. Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin. Translation: The decision wasn't unanimous among the committee's 10 voting members. Eight voted for the rate cut. One was absent. The other is William Poole, president of the Federal Reserve Bank of St. Louis. He did not believe that current conditions justified a rate cut before the meeting scheduled for Jan. 29 and Jan. 30. Note that this doesn't mean Poole was against cutting rates; he was just against cutting them now instead of next week.
FED: In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis.
Translation: The discount rate, which is what the Fed charges member banks for direct loans, is cut three-quarters of a percentage point, too, at the request of two of the system's 12 member banks.
-- Posted: Jan. 22, 2008
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