Fed cuts rates to 4.5%, has a GDP surprise

So the Fed cut rates to 4.5%, and the US commerce department released a GDP estimate of 3.9% annualised growth (about 1.0% quarterly growth).

That growth figure was on the back of another negative contribution by the residential construction market, and was thanks to exporters and consumers. The Feds tone was relatively neutral, giving everyone the feeling that, bar a big shock, interest rate cuts are done for now.

What does this mean for little old New Zealand, higher world demand, higher commodity prices, and a higher exchange rate. Pretty much 🙂

  • Kimble


    One thing to watch for is the default rates for the September and October 2006 vintage of sub-prime mortgages. This could be another shock to the system.

    Could this rate reduction be preemptive? Is there much point in that at all?

  • Matt Nolan

    My feeling is that they are trying to be extra careful, as they expect sub-prime to just get worse. I can’t see much shifting market sentiment except a war or a downturn in consumer spending.

    I’d like to see how inflation is panning out across the world, that could well be next years issue

  • Kimble

    Sub-prime may get worse, but I reckon most companies with an exposure have realisticly revalued their holdings. It makes more sense to take one HUGE hit, than a couple small ones. One really bad result is disappointing, two is a trend.

  • Matt Nolan

    The revaluation will be important. I suspect many of the firms would have revalued holdings based on a contingency of deliqiencies continuing from the current economic environment. The real question then is, to what degree will deliqiencies worsen if economic growth in the US slows.

    I still feel that investors are willing to take on a significant amount of risk, and I can’t see that lasting in the long run. However, if growth keeps on sitting this strong there shouldn’t be any problem.

  • Kimble

    Credit downgrade of both BOA and Citi… BOOM! There go the financials.

    I cant help feeling that the credit downgrades are simply repeating information we already have! Why are they a surprise to anyone?

    Exxon is struggling to make money. Oil is approaching $100/b and Exxon is falling short of profit expectations. WTF?

  • Matt Nolan

    Credit ratings are notoriously slow at reacting to underlying fundamentals, I was actually reading an article on that on Bloomberg yesturday.

    Payroll data out tonight will sell it for me. Once I see how the payroll data we’ll have more idea about how strong consumer spending will remain, as the US acts pretty much like a ‘closed economy’ the movement in consumer spending will be danged important.

    Notice that people realised that the Fed took a neutral tone on yesturdays meeting, making the DOW fall hard.

  • Matt Nolan

    Making it fall hard on top of the downgrade of course 🙂

    Do you know where I could find the durable goods consumption index in the US?

  • Kimble


    Data tables on the right hand side may be the way to go. You could contact them directly and ask for more historic data.

    The latest fall in response to the downgrades either means people are panicking over old news or that they didnt want to believe that old news and were waiting for the individual anaylsts to confirm the bad news.