Fed signals today's cut may be it

The Federal Reserve Building, Washington, D.C. Photo by Joshua Roberts/Bloomberg News

by Frank James

Federal Reserve policymakers sound like they're going taking a break, at least after today, from lowering the key short-term interest rates they control.

In their statement released today, members of the Federal Open Market Committee, who dropped a key rate by 25 basis points to two percent, strongly signaled in Fedspeak that they've probably done enough in recent months to goose the flagging economy.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Fed officials weren't exactly saying they wouldn't drop rates futher, but they certainly sounded like they were moving from an activist posture to what doctors would call watchful waiting. Still, they're clearly leaving open their options should the economy worsens.

But they also are clearly running out of ammunition, with the federal-funds rate, what banks charge each other for overnight loans, getting closer to zero percent, which is basically free money, than the central bank would like, especially since inflationary forces are at play in the world, which the Fed duly noted:

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.