Fed Reduces Funds Rate

September 25, 2007--For the first time in four years the FOMC cut the funds rate, reducing it to 4.75%. On the inflation front, the consumer price index fell 0.1% in August while the producer price index posted a 1.4% decline. Concurrently, the housing market remains weak, as housing starts fell 2.6% to 1.331 million units. Last, the index of leading economic indicators fell 0.6%.

 

Federal Open Market Committee Meeting
For the first time in four years, the FOMC reduced the funds rate, bringing it down 50 basis points to 4.75%. They said, "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." The committee will continue to monitor inflationary risks and the financial markets going forward for future decisions.

 

Consumer Price Index
The consumer price index fell 0.1% in August following a 0.1% uptick in July. The slight overall decrease was caused by a 3.2% drop in energy prices. The core CPI, which excludes food and energy prices, inched up 0.2% for the month. On a year-ago basis, the top-line CPI has increased 1.9% while the core CPI is up 2.1%. Inflationary pressures remain under control and should continue to ease through the rest of 2007.

 

Producer Price Index
Producer prices for finished goods fell 1.4% in August, its second decrease in three months. The overall decline was driven primarily by a big drop in prices for finished energy products, which plunged 6.6%. Core prices, which exclude food and energy prices, saw a 0.2% uptick. Compared to a year ago, the overall PPI has risen 2.1% while the core PPI is up 2.2%. Inflationary pressures from the producer's side appear to be in check.

 

New Residential Construction
Housing starts fell 2.6% to 1.331 million units in August following a 6.9% drop in July. Furthermore, housing starts are down 19.1% on a year-ago basis. Housing permits decreased 5.9% to 1.307 million units in August and are down 24.5% compared to a year ago. Despite the cut in the funds rate by the Fed, the housing market is still weak and housing starts will be constrained for the remainder of 2007.

 

Conference Board Leading Indicators
The Conference Board’s Index of Leading Economic Indicators decreased 0.6% in August, almost cancelling out the 0.7% gain from July. Eight of the ten components made negative contributions to the index, led by lower stock prices, higher initial jobless claims, and a big drop in building permits. Over the past three months, the index has fallen 0.3% at an annual rate while the 6-month annualized growth rate
is 1.0%.