Fed cuts rates to 3.0%, GDP growth poor

As the market expected the Fed cut its Federal Funds rate to 3.0% (down 50 basis points), a full 125 basis points lower than it was at the last meeting.  In the accompanying statement they touched on all the issues that they have previously complained about:  Weak housing market, softening labour market, and the erratic credit market.  The main issue for the Fed appears to be liquidity, as the idea of a financial accelerator comes into play.

They did also mention inflation – they said that they expect it to moderate.  However, any upside shocks on the inflation front could cause concern for the Fed.

On the GDP side the market received a downside surprise, with a growth estimate for the December quarter of 0.6% (this is equivalent to approximately 0.15% quarterly, seasonally adjusted growth).  A poor turnout for residential investment and a strong de-stocking in inventories were the main driver of this easing in growth.  A good description of the data is given by Econbrowser.

What does this mean for New Zealand?  Well our dollar jumped half a cent against the US$ as the yield gap rose, we are now pushing $0.79US again.  The market didn’t seem terribly phased by the GDP figure, given underlying ‘strength’ in consumption and exports.  As a result, commodity prices should hold up at least a little longer 😉