Fed cuts 25 bps, as expected

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.

What does this mean for our fund? I think it means that we can continue to work at deploying capital on a consistent basis. The Fed has been successful in creating some sort of “soft-landing” for the housing collapse (i.e. avoiding another Great Depression).

I believe we will see further market turbulence as the final sub-prime write-downs finally come out the tailpipe, but that the worst is over. It may take awhile for the markets to get steady on their feet, but at least they don’t appear KO’d for the count. I think we continue along, prepared to deploy capital at a consistent basis, while taking advantage of market pullbacks.

Further Reading (Bill Gross’ Investment Outlook May 2008):

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+May+2008.htm