Energy Matters

The FOMC has cut the federal-funds target rate to 2.00%, leaving it with 100 points of monetary-policy power left. (A fed funds rate below 1.00% is practically ineffective monetary-policy power.) Again at this meeting, two FOMC members disagreed with a cut, favoring leaving the rate as it was (at 2.25%). (The FOMC also cut the discount rate 25 points to 2.25%.)

Commentators suggest the Fed won’t cut the rate further any time soon. The FOMC may have noticed that cuts so far this year have not encouraged banks to offer much new credit, thus new commercial and consumer spending, although the cuts may have helped many ARM-holders hang on. 

Yet, a lower interest rate doesn’t help credit consumers if banks won’t offer loans.

Following is the FOMC’s statement on April 30:

“The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent. Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further.

“Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters. 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. 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.

“Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting. In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta, and San Francisco.”

 –Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, Oil and Gas Investor This Week, www.OilandGasInvestor.com; ndarbonne@hartenergy.com   

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