Fed Cuts 75 – Statement Gives Increased Weight To Inflation Concerns

After cutting rates dramatically (125 basis points cumulative) on Jan 22 and Jan 30 and notably weighting their concern towards economic growth, the Fed slowed down a bit today with a 75 basis point cut. 

It is a big cut but many particpants were expecting 100 basis points and the Fed gave more weight to inflation concerns in their statement than they have in the last two.  In addition, two governors dissented preferring a less aggressive cut.

Compared to “The Committee expects inflation to moderate in coming quarters” (Jan 30 FOMC Statement) today’s statement reads “Inflation has been elevated, and some indicators of inflation expectations have risen” (March 18 FOMC Statement).  They also reference inflation concerns in the policy paragraph in contrast to having left out those concerns completely in the last two statements.

This is a nod to the gold and foreign exchange markets with gold tearing through $1000 and the dollar getting crushed.  The Fed is saying: “We are aware of these conditions and they factor in to our decisions”.

As a consequence, gold has sold off to the tune of about $20 compared with before the decision and the dollar has rallied against the euro ($/Euro 1 Day Chart) and yen ($/Yen 1 Day Chart).

I am surprised that the market hasn’t tailed off a bit more and I wonder if we’ll see a bit of a selloff tomorrow as investors reconsider the new emphasis.