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 😉