FOMC Meeting Leaves Interest Rates Unchanged: Archive Entry From Brad DeLong's Webjournal

September 24, 2002

FOMC Meeting Leaves Interest Rates Unchanged

The Federal Reserve's Open Market Committee did not cut interest rates today: they left them unchanged. Recent news about the declining speed of the recovery has not yet pushed them over the edge into thinking that more stimulative policies are needed.

I confess that I have a hard time understanding why.

FRB: Press Release -- FOMC statement -- September 24, 2002

Release Date: September 24, 2002

For immediate release

The Federal Open Market Committee decided today to keep its target for the federal funds rate unchanged at 1 3/4 percent.
The information that has become available since the last meeting of the Committee suggests that aggregate demand is growing at a moderate pace.
Over time, the current accommodative stance of monetary policy, coupled with still robust underlying growth in productivity, should be sufficient to foster an improving business climate. However, considerable uncertainty persists about the extent and timing of the expected pickup in production and employment owing in part to the emergence of heightened geopolitical risks.
Consequently, the Committee believes that, for the foreseeable future, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness.
Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; William J. McDonough, Vice Chairman; Ben S. Bernanke; Susan S. Bies; Roger W. Ferguson, Jr.; Jerry L. Jordan; Donald L. Kohn; Mark W. Olson; Anthony M. Santomero, and Gary H. Stern.
Voting against the action were: Edward M. Gramlich and Robert D. McTeer, Jr.
Governor Gramlich and President McTeer preferred a reduction in the target for the federal funds rate.

Posted by DeLong at September 24, 2002 12:23 PM | Trackback

A perverse desire to let the economy get really bad?

At least the vote wasn't unanimous.

Consequently, the Committee believes that, for the foreseeable future, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness

This is a perfect justification for a rate cut.

Posted by: richard on September 24, 2002 01:35 PM

Recent news about the declining speed of the recovery has not yet pushed them over the edge into thinking that more stimulative policies are needed.

I confess that I have a hard time understanding why.

If the Fed cuts rates, they'll worsen the duration imbalance on FNMA's balance sheet, potentially precipitating a crisis that'd make LTCM look like a garden party.

FNMA is not only too big to fail, its hedging needs clearly exceed the capital market's ability to act as counterparty.

Agency debt and interest rate swap spreads are already creeping wider...

Posted by: George Zachar on September 24, 2002 02:16 PM

Maybe the Fed is feeling boxed in. The main outlet for rate cuts seems to be the housing market. Do they really want to keep encouraging people to increase their leverage in what many fear is a real estate bubble?

If that is an issue, then the onus falls on fiscal policy. I know, I know, the decision lags are long. But, gosh, if they could enact a quick $140 billion revenue-sharing package with the states (distributed on the basis of population, $1000 per person), that would take some pressure off Greenspan and Co.

Posted by: Arnold Kling on September 24, 2002 02:24 PM

Well, Greenspan doesn't control the FOMC any more as there are now more Bush appointees than not. As well, the committee in a bind, since fiscal policy is undermining monetary policy Even if it wasn't they don't have a lot of fingers (rate cuts) left to stick in the dyke anyway - we're reaching the limits of monetary policy.

And, of course, the cynical would say that keeping the powder dry so that a cut can come around the time of the war, and thus the war (and by corollary Republican policies) can been seen as good for the economy/market.

Posted by: Ian Welsh on September 24, 2002 09:00 PM

The Fed has no doubt modeled the lagged effects of previous rate cuts. It may have concluded that we have not yet exhausted these, and thus that the case for further loosening is not very compelling yet. It would be interesting, of course, if it had concluded that the lagged effects have indeed been exhausted but declined to loosen anyway.

Does anyone reading this board know anything about the Fed model?

Posted by: Jim Harris on September 25, 2002 06:54 AM

What is curious is that other than the fall in stock prices, I can find little evidence that there is significant economic weakness.

A slowdown has been much more evident to us in the past. This is a curious period, for if stocks were the key evidence we should be in considerable trouble. Oh well.

Posted by: on September 25, 2002 11:30 AM