On September 18, the Federal Open Market Committee (FOMC) adopted a decision after a 2-day meeting to cut its benchmark lending rate by 0.5% at once to 4.75%. The interest rate was lowered for the first time since 2003, following 17 consecutive hikes after which the FOMC members kept the lending rate unchanged during 9 meetings. Thus, the interest rate was changed for the first time since June 29, 2006.
The FOMC's members raised concerns in the statement about a slowdown in the economic growth against the backdrop of a significant housing correction. This decision is intended to limit the negative impact of destabilization on financial markets and “promote moderate growth over time”. The statement also noted that readings on core inflation slightly improved in 2007. However, some inflationary risks remain in place and FOMC will closely watch how the situation unfolds. Policy makers stressed that they will carefully monitor financial markets and take all measures required to rein in inflation and support sustainable economic growth.
The FOMC's statement led to robust growth of the US equity market and all major stock indexes gained more than 2.5% by the closing bell. We can see two key growth drivers of such trend. First, the Fed's decision to cut the lending rate by 0.5% outpaced expectations of economists who predicted a 0.25% cut. However, the most positive effect was the statement, which, for the first time in many months focused on a possible slowdown in economic growth and pointed to lower inflationary risks. The statement also underscored the important role of financial markets in economic development and the Fed's willingness to take all measures needed to maintain stability.
According to our estimates, although the Fed's decision to cut lending rates by 0.5% is a delayed reaction to the mortgage lending crisis, this measure will produce a positive impact on global financial markets. Yesterday's statement showed investors worldwide that the watchdog of the world's largest economy is “on the ball” and will pull out all the stop to avoid destabilization on financial markets.
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