What Happened: The Federal Open Market Committee today agreed unanimously to cut the target Fed Funds rate at 1.00%, the lowest rate since June 2004.

In the statement announcing its decision, the FOMC was considerably more subdued about the economy than it had been in announcing its policy decision in September or its inter-meeting rate reduction on October 8.

The FOMC’s action means consumers will see lower rates for home equity lines of credit, credit cards and auto loans since those loans are generally linked to the prime interest rate which is set at three percentage points above the Fed Funds rate. Mortgage rates are not directly affected as those rates are tied to rates for treasury borrowings which don’t react as quickly. But the real target of the FOMC’s action was the broader financial services sector, providing more money for banks. 

Here’s how today’s statement, paragraph by paragraph, compares with the September 16 statement issued after the last scheduled meeting when the Committee held the target Fed Funds rate at 2.00% and with the [October 8 statement], when the FOMC in a coordinated action with other central banks reduced interest rates by ½ a percentage point to 1.50%.

October 29 statement: Bold

September 16 statement: Italics

[October 8 statement: Brackets]

Comment: normal font

1) The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

[The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.]

This is a straightforward statement of the Committee action.

2) The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

[Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.]

The Committee underscored its emphasis on economic activity, shifting from concerns expressed in September about financial markets. The Committee also acknowledged the international situation with its reference to foreign economies and the prospective impact on exports. The FOMC offered its rationale thought for the rate cut noting the restraints on spending.

3) In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

[Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.] 

The Committee restored a reference to inflation expectations eliminated in September contending, as it had previously, the slowing economy will contain price increases.

4) Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

[The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.]

With this paragraph the Committee removed earlier hints of future rate cuts.

5) Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Ms. Cumming voted as the alternate for Timothy F. Geithner.

[Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.]

This decision, like the last two FOMC actions, was unanimous, suggesting inflation hawk Richard Fisher is comfortable inflation is contained.

What's Next: The minutes of this meeting will be released on November 19. The FOMC meets next on December 16, its last meeting of the year. During the 48-day gap between meetings policymakers will get two employment reports (November 7 and December 5) and two personal consumption inflation reports (October 31 and November 26). The Bureau of Economic Analysis will release its advance – first look – report on Gross Domestic Product for the third quarter tomorrow and a preliminary estimate on November 25.

Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.