The Reports are in...

Earlier this morning it was announced that the preliminary Q1 GDP growth rate was a sluggish 0.6%. The main reason the number was positive for this quarter was the build in inventories which count towards GDP this quarter but will be subtracted next quarter. This will most certainly lead to a negative number for Q2 amid a consumer slowdown caused by deflated housing prices. Nigel Gault, an economist at Global Insight sums up the report nicely:

"The economy just kept its head above water in the first quarter. Don't break out the champagne, though."


The Fed cut rates a quarter percentage point today which now puts the Fed funds rate (rate at which banks loan and lend to each other) at 2%. They also lowered the primary credit rate (rate at which banks borrow from the Fed) to 2.25%. Although there were two dissenting votes on the committee, this was pretty much expected. The Fed also mentioned that this would probably be the last cycle of rate cuts as most economists are predicting pauses in the future. Many people including myself argue that these cuts are unnecessary because monetary policy doesn't immediately impact the economy, but instead lags the current markets. This cut may not take effect until late 2009 and by then conditions could already be corrected. Inflation is still a major concern because it will entail higher consumer prices which will lower GDP growth. The Fed surely understands that the decisions they make have numerous ripple effects on the markets and the economy but sometimes it is hard to determine how large the effects will have.

So what does this mean? Uncertainty for one! It is very unclear where the economy is headed in the near future and it looks more likely to favor the downside. Things will become clearer with time as we see how the previous Fed cuts affect the economy.

Source: WSJ