Fed Cuts Funds Rate Once Again

March 25, 2008--The Federal Open Market Committee cut the federal funds rate 75 basis points, as problems continue to plague many areas of the economy. Industrial production and utility output fell in February, while a reduction in food prices moderated other inflationary pressures throughout the pipeline as the Producer Price Index rose. Last, the housing market continues to struggle, as new residential construction slowed last month.

 

Federal Open Market Committee Meeting
The FOMC lowered the federal funds rate 75 basis points to 2.25%. The committee noted their worries over stressed financial markets, restricted credit, and weakening labor markets. With this latest cut, the FOMC has dramatically reduced rates since it began loosening monetary policy mid-year, down 3.00 percentage points, from 5.25%. The Fed continues to weigh uncertainty in financial markets and the prospect of weak growth ahead as its primary policy goal in the short term and believes inflation will moderate going forward.

 

Industrial Production
Industrial production plunged 0.5% in February. Utility output led the decline, dropping 3.7%, while manufacturing output decreased 0.2%. However, mining activity rose 0.4%. Capacity utilization fell to 80.9%, the first reading below 81 in over two years.

 

Producer Price Index
Producer prices for finished goods rose 0.3% in February. Energy prices increased 0.8% in February.  Prices for food decreased 0.5% in February after increasing 1.7% in January. Moreover, core prices, which exclude food and energy prices, increased 0.5% for the month. These mixed results drove the trend--like increase in the headline PPI number. If demand remains stable during the coming months, topline inflation will likely remain stable, thus giving monetary policy makers some leeway to stimulate growth.

 

New Residential Construction
New home starts decreased, falling 0.6% to 1.065 million units at an annual rate in February, accompanied by a decrease of 7.8% in housing permits. Compared to February of 2007, housing starts are down 28.4%. The housing market remains soft, even with lower mortgage rates, as the ongoing credit crisis continues to deter potential buyers. Moreover, March's National Association of Home Builders housing market index of builder optimism remained unchanged at a very low level.