LP L FINANCIAL R E S E AR C H

Market Update
John Canally, CFA
Vice President, Investment Strategist, LPL Financial
April 30, 2008

Fed Cuts Rates by 25 BP

Probably Done Cutting For Now
The Federal Reserve Open Market Committee (FOMC) announced a 25
basis point 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 2.00%,
the lowest since late 2004. The Fed also cut its discount rate by 25 bps
to 2.25%.

As is often the case, what the FOMC said in the statement accompanying
the rate action was more important that the action itself. Today was no
exception, as the market was fully pricing in the 25 bp cut, but was uncertain
as to the Fed’s future policy actions.

There was a substantial shift in the tone of the FOMC statement, which
strongly suggests to us that the Fed is comfortable keeping the Fed Funds
rate at the current 2.00% level for the foreseeable future. In short, the
FOMC a) cautiously raised its outlook for the overall economy, b) became
more sanguine on the outlook for inflation, and c) moved from the “panic”
mode it had been in since January 2008 to a “wait and see” mode

The Fed signaled its upgrade of the economic outlook by removing the
phrase “downside risks to the economy remain” from the FOMC
statement and noting that “economic activity remains weak” rather than
saying “economic activity weakened further” as it did in the March 18
FOMC statement .

In signaling its upgrade on inflation (i.e., more subdued inflation readings),

the FOMC removed the phrase “inflation has been elevated” and replaced
it with “readings on core inflation have improved somewhat”. The Fed also
noted that “uncertainty about the inflation outlook remains high” rather than
“uncertainty about the inflation outlook has increased” as it did in the March
18 FOMC statement.

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 MARKE T UP DAT E

The Fed signaled the move from “panic” mode to a more cautious approach
to monetary policy by stating “the committee will act as needed to promote
sustainable economic growth and price stability” rather than saying “the
Committee will act in a timely manner to promote sustainable economic
growth and price stability” as it did in the March 18 FOMC statement.

Finally, the Fed signaled that it is probably done cutting rates this cycle
(barring a complete collapse of the economy or some exogenous shock)
by using the phrase “the substantial easing of monetary policy to date” in
today’s statement, versus “today’s policy action” in the March 18 statement.

As was the case with the March 18 FOMC meeting, the vote today by the
FOMC to cut rates by 25 bps was not unanimous. In fact, it was 8 to 2, with
noted inflation hawks Richard Fisher, President of the Federal Reserve Bank
of Dallas and Charles Plosser, President of the Federal Reserve Bank of
Philadelphia voting for no change in the fed funds rate today.

Our view was that the Fed would leave the door open more than people
had thought to additional rate cuts, that we’d go from a 2.00% Fed funds
trough in the futures to something a bit lower, and that futures below 2.00%
could hurt the dollar. That happened, but to a lesser extent than we feared.
The trough in the Fed funds rate per the futures is now at an implied rate
of 1.94% in August, after being at 2.02% just ahead of the release of the
statement; the dollar weakened almost imperceptibly against the Euro (half a
cent) from 1.555 to 1.560. This move in the Fed funds futures and the dollar
may continue, but there was no powerful immediate reaction and that is
good news.

In announcing the cut, the FOMC said:

(our emphasis added)

The Federal Open Market Committee decided today to lower its target for
the federal funds rate 25 basis points to 2 percent.

Recent information indicates that economic activity remains weak.

Household and business spending has been subdued and labor markets
have softened further. Financial markets remain under considerable stress,
and tight credit conditions and the deepening housing contraction are likely
to weigh on economic growth over the next few quarters.

Although readings on core inflation have improved somewhat, energy and

other commodity prices have increased, and some indicators of inflation
expectations have risen in recent months. The Committee expects inflation
to moderate in coming quarters, reflecting a projected leveling-out of

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 MARKE T UP DAT E

energy and other commodity prices and an easing of pressures on resource

utilization. Still, uncertainty about the inflation outlook remains high. It will be
necessary to continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing

Federal Open Market Committee:
measures to foster market liquidity, should help to promote moderate
Fed Funds Target Rate %
growth over time and to mitigate risks to economic activity. The Committee
7 will continue to monitor economic and financial developments and will act
6 as needed to promote sustainable economic growth and price stability.

5
Voting for the FOMC monetary policy action were: Ben S. Bernanke,
4 Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S.
3 Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M.
Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who
2
preferred no change in the target for the federal funds rate at this meeting.
1
98 99 00 01 02 03 04 05 06 07
In a related action, the Board of Governors unanimously approved a 25-basis-
Source: Federal Reserve Board/Haver Analytics
point decrease in the discount rate to 2-1/4 percent. In taking this action, the
04/30/2008
Board approved the requests submitted by the Boards of Directors of the
Federal Reserve Banks of New York, Cleveland, Atlanta, and San Francisco.

Important Disclosure

The opinions voiced in this material are for general information only and are not intended to provide specific
advice or recommendations for any individual. To determine which investment(s) may be appropriate for you,
consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of
future results. All indices are unmanaged and cannot be invested into directly.

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