50bp, and it’s unanimous!
So much for prediction
markets. The half-point gap between the funds rate and the discount rate
remains, but with the discount rate now at 5.25%, it’s definitely more attractive
to banks facing liquidity problems. The Fed’s statement explicitly says that
it’s cutting in response to financial, as opposed to real-world, developments:
Today’s action is intended to help forestall some of the adverse effects
on the broader economy that might otherwise arise from the disruptions in
financial markets.
Are central banks becoming pushovers? First the UK government decides to guarantee
all the deposits at Northern Rock, now this. Still, it’s probably good for the
central bank to be at least a little bit ahead of the curve. A 25bp cut would
have meant that everybody expected another cut at the next meeting; after this,
however, and with the language about inflation risks remaining, we might be
stuck at 4.75% for a while.