The Fed lowered its target Tuesday for the federal funds rate 25 basis points to 4.25 percent. The discount rate, what banks pay to borrow from the Fed, was also cut by a quarter-point to 4.75 percent.
The Fed hopes its actions will boost the economy. But yesterday morning, many people were hoping something else–that the Fed would do more.
The industry has been speculating for weeks about what the Fed would do at its December meeting. For awhile, a big cut seemed almost certain. And then, a rush of recently-released economic reports threw some uncertainty into the mix.
- Government results showed home prices were rising; other analytical reports disagreed.
- Last week’s Labor Department report showed construction and real estate job weakness, which proved the housing slump was still in effect–but the report also found that overall, jobs had been added in the month, indicating the economy might be slowing, but not stopping. (Which doesn’t sound very positive, but that’s generally how the news was received.)
- And, of course, there is the mortgage rescue plan, also announced last week, which–although widely panned–also could be interpreted as a sign of recovery to come.
So, going into this week, no one was really sure what the Fed would do. Wall Street echoed the sentiment Monday, when U.S. stocks were flat as the market waited for the possible rate cut announcement, Reuters reported.
And, once the Fed made that announcement, stocks promptly fell. Much analysis of the drop indicated it was due to market disappointment. Many expected a cut–but they were hoping for a bigger half-point cut.
So what was the Fed thinking? Did it not read our economy’s Christmas list?
Or perhaps it did. Some sources have speculated the Fed only offered a quarter-point cut precisely because they are aware of each of our Christmas lists–and the fact holiday shoppers are currently out in stores, trying to fulfill them.
But it depends who–and what data–you listen to.
Data released today from MasterCard Advisors’ data service show sales, excluding cars (which I know I’m not getting for Christmas), rose 0.8 percent last month. In October, sales increased only 0.2 percent: So that’s good news.
And, according to Reuters, when you exclude gasoline (which, since I’m not getting that new car, I can), sales were actually up 1 percent.
Yet other research, released yesterday by the International Council of Shopping Centers, paints a less rosy retail picture. The ICSC report said chain-store sales increased a disappointing 0.2 percent for the week ending Dec. 8; their sales had been down by 2 percent the week before.
In addition, the National Retail Federation this week predicted holiday sales for 2007 will be up just 4 percent–the smallest holiday sales growth since 2002, CNNMoney.com reports.
So it’s unclear whether or not consumer spending will be able to bolster the economy. Fears of a recession still abound. What a big Bah, Humbug for the financial system.
However, the holiday is still around two weeks away. In past years, sales numbers have been slow until closer to Christmas, indicating shoppers often delay purchasing–which could mean spending might make a comeback.
Or spending very possibly could decline. And, although low consumer spending is a scenario unlikely to end up on anyone’s seasonal wish list, it might actually be a gift: Because more negative economic news is the most likely catalyst to push the Fed into making another, larger rate cut when it meets in January.