An LPL Financial Research

Market Update
January 30, 2008

John Canally, CFA Fed Cuts Rates by 50 BP — Still More to Come

Vice President • The Federal Reserve Open Market Committee (FOMC) announced a 50 basis point
LPL Financial cut in its Fed funds rate target at the conclusion of its regularly scheduled two-day
meeting today. The target Fed funds rate is now 3.00%. The Fed also cut its discount
rate by 50 bps to 3.50%.

• Today’s move was fully priced in, although as recently as a few days ago, the market
was pricing in a 75 bp cut at this meeting.

• Today’s 50 bp cut comes a little more than a week after the Fed’s surprise 75 bp cut
on January 22, which was the first “intermeeting” cut – i.e., not at a regularly
scheduled FOMC meeting – since September 17, 2001, when the Fed cut rates by 50
bps in reaction to the terrorist attacks on the U.S. on September 11.

• As noted in the text of the statement below, only one member of the FOMC, Richard
Fisher, the President of the Dallas Fed – a well known inflation hawk – voted against
the move. This strong support is notable, because there have been a wide range of
opinions from voting members of the FOMC in the press in recent days, and it’s another
sign that Fed Chairman Ben Bernanke may be gaining the respect of his colleagues
on the FOMC.

• The change in the wording of this statement versus the statement accompanying
the January 22 rate cut suggests that the FOMC thinks it has done enough for now.
However, the Fed has left the door open for more cuts by saying “ downside risks to
growth remain.”

• The market has already priced those cuts in, and now expects a 2.5% Fed funds rate
by yearend 2008.

• After today’s move, the Fed’s view of what it needs to do and the market’s view of
what the Fed needs to do seem to be in sync for the first time in a while. Recall that
just a week ago, the market was pricing in a 1.75% or 2.0% end point for the Fed
funds rate. A 2.25% or 2.5% end point now seems the more reasonable consensus.

In announcing the cut, the FOMC said:

“The Federal Open Market Committee decided today to lower its target for the federal
funds rate 50 basis points to 3 percent.

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.

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Market Update | January 30, 2008 | Page 1 of 2
The Committee expects inflation to moderate in coming quarters, but it will be necessary
to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, should help to promote moderate
growth over time and to mitigate the risks to economic activity. However, 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.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy
F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin;
Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against
was Richard W. Fisher, who preferred no change in the target for the federal funds rate at
this meeting.

In a related action, the Board of Governors unanimously approved a 50-basis-point

decrease in the discount rate to 3-1/2 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, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San
Francisco.”

Federal Open Market Committee: Fed Funds Target Rule

%

10 10

8 8

6 6

4 4

2 2

0 0
90 95 00 05
Source: Federal Reserve Board/Haver Analytics 01/30/08

Important Disclosure
The opinions voiced in this material are for general information only and are not intended to provide or be construed as
providing specific investment advice or recommendations for any individual. To determine which investments may be appro-
priate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee
of future results. All indices are unmanaged and cannot be invested into directly.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial, UVEST Financial Services
Group, Inc., IFMG Securities, Inc., Mutual Service Corporation, Waterstone Financial Group, Inc.,
and Associated Securities Corp., each of which is a member of FINRA/SIPC.
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Market Update | January 30, 2008 | Page 2 of 2
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