Fed Policy Halloween Pick'em

Shortly after 2:00 pm, the Federal Reserve will announce the results of its October policy meeting.  Will they announce another interest rate reduction or stand pat?  And if they cut, will it be a quarter or a half point?  And will any change to the fed funds rate (the rate at which banks borrow short-term from each other) diverge from any change to the discount rate (the rate at which banks borrow from the Fed), as was the case in August for the first time in 6 years.

Last month, the FOMC finally pivoted and gave us the first reduction in the federal funds rate since 2003.  25% of this blog's brilliant readers accurately predicted that they would lower both the fed funds and the discount rate by a half point.  Interest rate futures currently imply a better than 90% of a cut and the Fed may be weighing some wobbly recent economic news in the form of consumer confidence and housing reports, as well as ever-higher oil prices.

The tension mounts!

I'll update with the results and the Fed Language Watch once the statement is released.

Update: If you said quarter point cuts to both rates, kudos.  The market appears peeved thus far in the whipsawing aftermath.  Still up for the day, but giving up most of the session's gains in the wake of the announcement.  Perhaps a combination of dashed secret hopes for a half point cut and hand-wringing about whether the decision to cut even by a quarter signals the Fed thinks the economy is in trouble.  Then again, we got a surprisingly good GDP report just a few hours before the decision was released.  Perhaps we'll rocket back upward in the final hour, as would be in keeping with the frenetic ambivalence that tends to follow these releases.

Interestingly, the vote was 9-1 in favor of the fed funds rate cut, but unanimous for the discount rate cut.  Thomas Hoenig apparently wanted to squeeze the spread between the rates down to a quarter point (they spent the six years leading up to September of this year separated by a whole point).  Squeezing the spread lessens the penalty banks pay for shoring up their reserves by borrowing directly from the Fed, versus borrowing from other banks.

Hmm, now that I type that out loud... turns out it's not all that interesting.

Anyway, here's your "track changes" copy.  Judging by the language changes, the FOMC seems to be signaling hard that it has just pivoted from its two-month-old easing bias back to neutral.  Doesn't mean we won't have any more cuts, just that they're not currently planning any more (the way I read it).  But plenty can change in the next six weeks.

Release Date: September 18,October 31, 2007

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 5025 basis points to 4-3/44-1/2 percent.

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 tosolid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets andto promote moderate growth over time.

Readings on core inflation have improved modestly this year. However,year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook.The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of thesefinancial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans;Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh.

Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 50-basis-point25-basis-point decrease in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City,New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.