Fed Lowers Rate Target. Time to Pop the Cork?

Yesterday afternoon, the Federal Open Market Committee did what was not expected, if you paid any attention to published reports, yet what was already priced in by the futures markets and lowered its target for the federal funds rate by 50 basis points to 4.75%. While US equity markets reacted favorably to the news, with the Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 indices all up on the news today, it is unclear as to whether this is a sign of good things to come, as the equity market reaction seems to suggest, or merely an attempt to forestall an inevitable slowdown of the US economy. The Fed, for its part, couched its change as a response to the current troubles which have hit the credit markets, in particular mortgage lending:

"Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time."

FOMC Statement September 18, 2007

It certainly seems that the Fed is responding to pressure from the financial community to ease its monetary policy in the face of increasing difficulties in the credit markets in general, as well as to perhaps throw those who recently financed their purchase of a home with an adjustable rate mortgage a bone. Needless to say, this is probably not good news for the US dollar, which continues to depreciate in value relative to other major currencies. One does get the feeling after reading the FOMC statement that we may be headed deeper into a rough patch.