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Federal Reserve OMC Cuts Fed Funds Target Rate 75 Bps to 3.5 Percent. The Federal Reserve Board issued this statement, "The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.... The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully. The Fed funds target has been reduced from 5.25% in August; market participants speculate that another cut may occur at the Fed's regular meeting next Thursday. Money fund yields should follow the Fed lower and should fall from the current 4.32% to just over 3.5% over the next month. Money fund assets should see their strongest weekly inflow in history next week, as institutional investors attempt to delay the impact of the lower rates on their cash by moving to money funds. We guess that over $200 billion will move into funds in the coming week.
