Vital Market Signs at Selected Prior FOMC Meetings

October 29, 2008

  EUR/$ $/JPY 10Y, % DJIA Oil, $
06/30/04 1.2173 109.44 4.63 10396 37.95
06/30/05 1.2090 110.89 3.96 10370 57.00
06/29/06 1.2527 116.07 5.20 11077 73.41
06/28/07 1.3452 123.17 5.10 13456 69.82
08/07/07 1.3749 118.55 4.73 13510 72.27
09/18/07 1.3888 115.75 4.51 13475 81.42
10/31/07 1.4458 115.28 4.42 13873 93.59
12/11/07 1.4682 111.49 4.11 13645 89.78
01/30/08 1.4792 107.31 3.70 12454 91.70
03/18/08 1.5786 98.73 3.41 12257 107.53
04/30/08 1.5562 104.58 3.83 12953 111.54
06/25/08 1.5568 108.37 4.18 11837 133.62
08/05/08 1.5445 108.42 3.97 11484 119.82
09/16/08 1.4144 105.16 3.36 10936 91.18
10/08/08 1.3625 99.87 3.50 9447 87.02
10/29/08 1.2965 97.53 3.84 9040 66.20

 

The FOMC is widely expected to cut the Fed funds rate by 50 basis points to 1.0% around 18:15 GMT today. There have already been eight reductions adding up to 375 basis points and starting with a unanimously voted 50-basis point drop on September 18, 2007. Only two of the other seven cuts were unanimous decisions. Hoenig objected to the second reduction, a 25-bp cut on 10/31/07, and Rosengren favored a 50-bp cut last December 11th, when the majority agreed to a drop of 25 bps. A 75-bp inter-meeting cut last January 22nd drew a dissent from Poole, and Fisher and Plosser objected to cuts of 75 basis points last March 18th and of 25 basis points on April 30th. Cuts of 50 basis points each on January 30th and October 8th (a second inter-meeting move) were voted unanimously.

Fed easing was paused for five months until earlier in October. During that period, the Dow Jones Industrial Average sank 27%, and the dollar climbed 14.2% against the euro and by 10% on a trade-weighted basis. Oil shot up 32% to $147.27 in July but then plunged to a loss of 22% on balance. The investment banking industry as we knew it disappeared, and money market premiums increased sharply. Governments and banks around the world took heroically innovative steps to pump liquidity into the market in a vain effort to stave off the serious global recession that has taken root. All matters of aggregate demand, economic output, and business and consumer confidence have fallen very sharply. The U.S. housing market still hasn’t stabilized.

This will be the second U.S. experience with a 1% Federal funds rate in this decade. The FOMC cut the rate in 2001 from 6.5% to 1.75%, reduced the rate by an additional 50 basis points on November 6th, and made one final cut of 25 bps on June 25, 2003 to 1.0%, where such stayed for the ensuing 12 months. At 17 consecutive meetings from mid-2004 to mid-2006, the funds rate was raised by 25 basis points each to a cyclical high of 5.25%, a level that was maintained for 14-1/2 months until the current cycle of easing began.

The table above documents some vital U.S. market indicators (the dollar, the 10-year Treasury yield, the DOW, and WTI oil prices) at the time when FOMC rate announcements were made after meetings since mid-2007 and the midyear meetings in 2004-2006.  These are compared to levels at 14:45 GMT today.

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