Federal Reserve Update

Investors are concerned about the impact of the ongoing credit crunch. These concerns are amplified by media coverage of daily declines in widely followed financial indices and by contemporary reports that overall activity in the U.S. economy has significantly decelerated. Acting at least partly on investor concerns the Federal Reserve (Fed) today lowered its target rate for the federal funds (fed funds) rate to 2.00 percent from 2.25 percent. The latest reduction in the federal funds rate is consistent with prior reductions, and we believe it is an indicator of the Fed’s concern that the U.S. economy is in recession. At TIAA-CREF, we expect the Fed to take whatever measures may be necessary to minimize the length and the severity of any reduction in the rate of economic growth.

The federal funds rate is the short-term interest rate for the U.S. economy. The yield curve for U.S. Treasury Bonds and all other fixed-income securities follows from the short-term interest rate. Hence the latest Fed announcement is generally seen as positive for bond prices.

We believe that today’s announcement is further evidence that the Fed will continue its vigilant monitoring of conditions in U.S. and international financial markets. Since the credit crunch began in the summer of 2007, the Fed has displayed a willingness to wield new tools for new conditions. In less than a year, the Fed has cut its federal funds rate by 325 basis points from 5.25 percent to 2.00 percent. In addition the Fed has instituted the Term Auction Facility (TAF) as well as the Term Securities Lending Facility (TSLF) to improve liquidity conditions in financial markets. It is important to acknowledge that monetary policy operates with a lag, but we expect these Fed actions to have a meaningful impact on economic growth going forward. Furthermore, we expect the Fed will continue using these new tools, and we also expect the Fed and other leading global central banks to continue their actions to improve market liquidity
and to support economic growth.

The investment staff at TIAA-CREF has been tracking and will continue to closely monitor all of the developments in the global financial markets. In particular, the investment staff expects that financial institutions in the U.S. and around the world will continue to report losses and will continue their attempts to raise additional capital.

In times of market stress institutional and individual investors may be tempted to focus on headlines rather than fundamentals. This is almost always a mistake. In times of market stress it is particularly important to stay focused on long-term financial goals and to resist short-term temptations. In times of market stress institutional and individual investors are often urged to sell at precisely the time when asset prices are at their lowest. The analogue of course is that market commentators may urge institutions and individuals to buy when asset prices are at their highest.

TIAA-CREF has been through many market cycles. TIAA-CREF accordingly believes in buying assets when they are marked down and selling assets when they are at a premium. TIAA-CREF views the current market environment as an opportunity to generate future returns for our participants.