The Federal Open Market Committee, FOMC, made further cuts Wednesday at the January meeting.  This action is following surprise rate reductions that were made last week, when the Fed made an aggressive cut of 75-basis-points.

According to the FOMC statement, the federal funds rate was reduced by another half percentage point, and a half percentage point was taken off the discount rate.  The current federal funds rate is now 3% and the discount rate is at 3.5%.  “Financial markets remain under considerable stress, and credit has tightened further for some businesses and households.  Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.”

The forecasts seem to get worse and worse.  Reports on the fourth quarter GDP indicated a staggering drop in the rate of growth, 0.6% which is a dramatic slow down from 4.9% in the third quarter.  The Fed continues to have inflationary worries, although it is seemingly not at the forefront of concern.  “The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.”

The hope of these actions, according to the FOMC is to promote moderate growth over time.  Stocks responded to the cut, but didn’t close well by the end of the day, Wednesday.  U.S. Treasury bonds rose and stock futures eased.  The open the morning was poised for a week open.  We will see how the stocks perform now that confidence in continued rate cuts is strengthening.

If symptoms of recession persist, it is more than likely that the Fed will continue to cut rates for the first half of the year.  The statement said, “…downside risks to growth remain.  The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.”

Usually, the action is to reduce rates.  Inflation is still not under wraps, but those problems take a back seat to the dramatically slowed GDP growth, and the ever tightening credit conditions.  The liquid injections through the newly instituted TAF program is yet another attempt to resuscitate the economy.  $30 billion was released to winning bidders for a 28-day credit early this week.  Hopefully the TAF program will improved overall bank liquidity and help their ability to lend.

The rate cuts and the TAF auctions will continue.  Together with a possible fiscal stimulus plan, yet to be fully approved, we will see some signs of positive economic performance.  It can’t all be heading downward, can it?

Economic reports from the fourth quarter are showing a slowdown. The Gross Domestic Product (GDP) came in below the projection of a 1.1% growth rate. According to the Department of Commerce, the GDP growth rate was a slow 0.6%.

The growth rate earlier in the year, for the third quarter, showed growth at a rate of 4.9%. The report from the fourth quarter showed a surprisingly more dramatic slow down than expected. Business investments were also slowed for the fourth quarter, as well as consumer spending (as we know). Housing investments are continuing to plummet at a quick pace.

The overall growth in the GDP for last year was a weak 2.2%. The 2006 report showed growth slightly higher at 2.9%. The rate of growth will probably not increase much if at all for 2008, or at least for the first two quarters. Since the GDP growth is still in the positive, we are not calling it a recession just yet. The danger is however that that rate of growth is way too close to a negative reading, and that means we are closer to recession than we have been for several years.

Many economists suspect that this report will prompt another rate cut of about 50-basis-points at today’s Federal Open Market Committee meeting. Investors are also looking for the Fed to announce rate reductions today. In light of the weak GDP for the fourth quarter, expectations are for at least the 50-basis-point reduction of the overnight rate.

There is a bit of a chance that the Fed might raise rates to stave off some inflation problems. The consumer price index is up to 2.7%, which is .7% higher than the CPI target. Over the course of last year, prices for goods and services have risen by 3.4%. Rates have to increase to help the inflation problem, but GDP growth is at such a problematic low that the Fed might choose to drop rates yet again to attempt a jolt in overall economic growth.

Fed Chairman Ben Bernanke made it clear is his speech and testimony earlier this month that the FOMC with make the necessary moves to fight against growth slowdown. We will see later today what that means.

Investors are still waiting for a definite rise in stocks to result from last week’s surprise rate cuts. It is typically a given that stocks will go up after interest rate reductions, but Wall Street is not yet seeing the desired results. This is rather puzzling considering the fact that the cut was the deepest since the early 1980’s.

The stocks fluctuated last week after the cut. There was some rising on Wednesday and Thursday, yet on Friday, there was another dip. The market still hasn’t rebounded to September levels, when the rate cutting campaign began. There is an FOMC meeting tomorrow and Wednesday, and some are expecting further cuts.

Perhaps the rate cuts just aren’t enough. There are extremely tight credit conditions, and consumers are drowning in debt (foreclosures and all). With consumer spending low, businesses aren’t profiting as much. The effectiveness that we have seen in rate cuts of the past didn’t include these pressing factors, particularly the housing decline which has taken a major toll on market performance overall.

The seemingly hasty move of the aggressive rate cut of 75-basis-points last Tuesday shows as the ‘tell tale’ sign that recession is imminent to some economists. Monetary policy takes time, and the rate cuts may not be enough to stave off recession. The effects of these moves probably won’t translate until after the second quarter. These cuts may slow down the impact and soften the blow, but if recession is coming, cutting rates can’t stop it.

Meanwhile, the global markets are faltering. Asian stocks tumbled 3%-7%. In Europe, major indexes were down about 2%.

Analysts are split, as usual, as to whether or not the Fed has been making the right moves. Some say more aggressive rate cuts earlier would have helped more, while others think that the cuts came too soon. The intent of the FOMC was seemingly preemptive in delaying recession, but also appears highly motivated by market performance rather than economic conditions.

At this week’s meeting, further cuts are expected. They will perhaps make a 25-basis-point reduction. If the FOMC does cut rates, it will probably not be as dramatic as the latest cut.