Rate cuts, the economy, and the buck

In the midst of dramatic losses in global equity markets, on Jan. 22 the U.S. Federal Reserve surprised traders with an unexpected inter-meeting 75-basispoint (bp) fed funds rate cut. Then, only eight days later at its regularly scheduled meeting, the Fed followed up with another 50-bp rate cut at the conclusion of the Federal Open Market Committee (FOMC) meeting on Jan. 30, fulfilling widespread expectations that another ease would be enacted that day.

While the dramatic 125-bp easing in the funds rate to 3 percent might be the extra shot in the arm needed to help prevent the U.S. economy from slipping into recession, it has opened the door to questions about the market leading the Fed.

“125 basis points in a little more than a week is nothing we’ve seen from the Fed since they began targeting the funds rate,” notes Jonathan Basile, economist at Credit Suisse.

“A 30 percent reduction in rates in just over a week means the Fed is working in crisis mode,” says Tim Rogers, chief economist at Briefing.com. “It seems odd that they did that much. It seems that the fed funds futures market and equity markets are leading the Fed. And, presumably, the Fed has a better idea of what is going on in the economy than fed funds futures traders.”