Slow Fourth Quarter, Fed Cuts Rate Again

The nation posted an anemic growth rate of 0.6% in the fourth quarter of 2007, hampered by the residential housing market and halving expectations from 1.2% GDP annual growth. In response to the slowdown, the Federal Reserve dropped its lending rate a half-point for the second time in eight days. It underscores the analysis that inflation has now become a secondary concern for the Fed:

The Federal Reserve reduced short-term interest rates on Wednesday for the second time in eight days, meeting widespread expectations by investors on Wall Street for a big rate cut.
In lowering its benchmark Federal funds rate by half a point, to 3 percent, the central bank acknowledged that it is now far more worried about an economic slowdown than rising inflation, and it left open the possibility of additional rate reductions.
“Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” the central bank said in a statement accompanying its decision. In addition, it said, recent data indicated that the housing market is still getting worse and the job market appears to be “softening.”
Taken together, the back-to-back rate cuts totaling 1.25 percent amounted to the Fed’s most aggressive effort in years to head off a recession. By comparison, the Fed under Alan Greenspan reduced the overnight rate by only a half-point after the terrorist attacks on Sept. 11, 2001.

The markets didn’t respond much to the announcement. It kicked off a short-lived rally, but it became apparent that traders had already factored in an expected Fed move. It might show the global markets that the US takes the economic slowdown seriously and keep them from panic selling, but otherwise, the rate cut looks like business as usual at the moment.
King Banaian of SCSU Scholars takes a look at the underlying issues in the slowdown:

If you just took the headline number — 0.6% growth in the fourth quarter, worst quarter in five years, versus a market expectation of 1.2% — you would think the GDP report today lays the foundation for believing recession is imminent and that the Fed’s expected move to cut interest rates another 50 bp would be more in line with what one would expect in a recession (though it might not yet meet the Taylor rule expectation.) But some are noting that the disappointment is more than made up by the housing sector and a very sharp selloff from inventories (knzn refers to a near-3% growth rate in ” nonresidential final sales”, which I think I know what that means.)
Well, nice try. Without the foreign sector, gross domestic purchases rose only 0.2% in the quarter, and real final sales decelerated from 4% in the third quarter to 1.9%. (Which means, btw, that real final sales to domestic purchasers — not overseas — was lower at 1.4%.) So while we might have some explanation for missing the expectation of 1.2%, you could hardly say we should have beaten it. The very best interpretation would be that the numbers generated little new information about the state of the economy.

I’ll be talking with King later today (special time of 1 pm CT) at Heading Right Radio to dissect the numbers. The economics chair of St. Cloud State University will walk us through the numbers, explain their meaning, and we’ll talk about the impact of the report on the political races of 2008.

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