Federal Reserve cuts interest rate

[Publius]

Fed cuts key interest rate in effort to fend off recession | Dallas Morning News | News for Dallas, Texas | Latest News

WASHINGTON – The Federal Reserve cut a key interest rate for the first time in four years, seeking with an aggressive half-point move to prevent a steep housing slump and turbulent financial markets from triggering a recession.

The Fed announced Tuesday that it was reducing its target for the federal funds rate, the interest that banks charge each other, from 5.25 percent to 4.75 percent. The half-point reduction was double the quarter-point move that many economists had been expecting.

The action was designed to boost economic growth by lowering borrowing costs for millions of consumers and businesses. Commercial banks were expected to quickly match the Fed's action by cutting their prime lending rate. The prime rate has been at 8.25 percent for the past 15 months.

The Fed's action came in the midst of the worst slump in housing in 16 years. That downturn has triggered record defaults in subprime mortgages and roiled financial markets around the globe as investors have become worried about where the spreading credit problems will next appear.

The financial market turmoil represents the first major test for Fed Chairman Ben Bernanke, who took over from the venerable Alan Greenspan in February 2006.

In addition to cutting the federal funds rate by a half point, the central bank also reduced its discount rate, the interest it charges in making direct loans to banks, by a half-point as well.

The Fed had also cut the discount rate on Aug. 17 as it scrambled to respond to the growing credit crisis.

In explaining its action Tuesday, the Fed said that "the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally."

Many analysts had predicted that Bernanke, who has been cautious since taking over as Fed chairman, would opt for a quarter-point move, the change in rates usually preferred by Greenspan.

But with this action, Bernanke appeared to be trying to surprise financial markets with a positive change after disappointing investors following the Aug. 7 meeting when he and fellow board members refused to change rates and still said inflation was the biggest threat facing the economy.

"Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time," the Fed said in a brief statement explaining its actions.

Analysts said rate cuts were certainly needed, given spreading weakness in housing, financial market turbulence and a bad August employment report which showed the labor market lost jobs for the first time in four years.

"We have a very soft economy and if the Fed doesn't lower rates then the economy could fall into a recession," said Mark Zandi, chief economist at Economy.com.

Zandi said he had trimmed his forecast to show economic growth of around 2.5 percent in the current quarter, down sharply from 4 percent growth rate in the April-June quarter. He said the fourth quarter is likely to be even weaker – at around 1.5 percent.

Analysts believe the Fed has room to cut rates because inflation pressures have been easing. In good news on that front, the Labor Department reported Tuesday that wholesale prices fell by 1.4 percent in August. It was the biggest drop in 10 months and much larger than the 0.3 percent fall that had been expected.

Economists said they believed that Bernanke, who wrote extensively as an economics professor on the Great Depression that followed the 1929 stock market crash, understands what needs to be done to avert downturns.

"We have had a long history of financial panics and if we have learned anything, it is that you shove money at them," said David Wyss, chief economist at Standard & Poor's in New York.

While some have complained that Bernanke has been more tentative than Greenspan would have been, no less an authority than Greenspan disagrees.

Doing a round of interviews to promote his new book, Greenspan, who was Fed chairman for 181/2 years, said Bernanke was "doing an excellent job" and he doubted that he would have done anything differently.

Greenspan told The Associated Press on Monday that the odds of a recession have grown since earlier this year, even though "the economy is not doing badly at this stage."

He put the odds of a recession at greater than one in three. "But best I can judge it is less than 50 percent," he said.

Greenspan's one-in-three prediction earlier this year rocked Wall Street.

The market has already responded favorably to this move by the Fed, as evidenced by this related article. Should be interesting to see how inflation will be affected though, as that's the other edge to the double-edged sword the Fed is playing with right now.

I find it disheartening however that once again the Fed is going to be lauded as a "savior" if this works, even though the situation the housing market is in has come about as a direct result of Fed backing allowing companies to make poor lending decisions. The Fed is being lauded once again for fixing a problem they helped create, rather than being derided for allowing it to happen in the first place.

[6SpeedTA95]

The housing bubble was partly the fault of the fed no doubt about it and I still wonder if this was the best long term solution to our current economic woes. I definately dont see a .5 or even a 1.0% cut greatly harming us in the long term and it should be plenty to keep inflation at least somewhat contained.

The markets are reacting favorably but in reality that means little about the economic stability of the nation. We'll see what happens as these new rates begin to affect the market (typically affects are seen starting at about 90 days after the adjustment).

[WickedLou9]

God damnit! I picked the wrong time to move out of equity. I dunno. the markets are still really shakey.

I knew as soon as I did it that it was the wrong move.

[Roonie]

it is a bandaid but the cut can still get badly infected. I think we are headed for worse times. Time will tell. I know I have a lot of money ready to invest but I am leaving it in money market temporarily until it settles down a bit.

[RMNIXON]

Originally Posted by WickedLou9

God damnit! I picked the wrong time to move out of equity. I dunno. the markets are still really shakey.

I knew as soon as I did it that it was the wrong move.

Don't you just hate it when you do things like that?

But the reverse would happen if you didn't.

So you end up feeling 100% stupid no matter what!

[WickedLou9]

Originally Posted by RMNIXON

Don't you just hate it when you do things like that?

But the reverse would happen if you didn't.

So you end up feeling 100% stupid no matter what!

I guess it could be worse. I didn't lose anything, I just gave up gains. that's it. Yeah that's what I tell myself.

[Ardentfrost]

I was reading the WSJ yesterday morning and it was talking about how the fed was going to cut the interest rate and they were wondering if it was going to be a quarter or half a point. I fig'd Bernanke would go with the half point since he doesn't care as much about inflation as some other economists (like Greenspan), but considering the market response yesterday, I guess a lot of other people thought he would be more conservative with the reduction.

Whatever though, we're still facing the onset of a bear market, so if this half point does anything, it'll do it very slowly.

[6SpeedTA95]

Originally Posted by WickedLou9

I guess it could be worse. I didn't lose anything, I just gave up gains. that's it. Yeah that's what I tell myself.

timing the market =

[WickedLou9]

Originally Posted by 6SpeedTA95

timing the market =

When it comes to retirement and long term savings sure. I havn't touched my 401k since last year. This was more of a short term thing. I just wanted to see if I could do better than my ING savings account. I decided to start with mutual funds. I should probably consider maybe trading stocks or something I dunno.

[6SpeedTA95]

Originally Posted by WickedLou9

When it comes to retirement and long term savings sure. I havn't touched my 401k since last year. This was more of a short term thing. I just wanted to see if I could do better than my ING savings account. I decided to start with mutual funds. I should probably consider maybe trading stocks or something I dunno.

I thought you meant your retirement...if its dickoff money time away my friend

[MFitzwater]

Greenspam got a bit testy when asked about his responsibility for Sub-prime melt on NPR last night. He said that our bubble was less pronounced compared to those around the world.

[6SpeedTA95]

Originally Posted by MFitzwater

Greenspam got a bit testy when asked about his responsibility for Sub-prime melt on NPR last night. He said that our bubble was less pronounced compared to those around the world.

Greenspan made a few mistakes when he was the fed chairman, one of them was dropping rates so rapidly and to such a low point. The rate really never should have dropped below 2.25% some even argue 3.0% which also seems like a very valid and reasonable number. Then when rates began to rise they raised them too rapidly. It typically takes 90 days to begin to feel affects of rate changes and 6 months for the effects to really reach their peak. So making many adjustments at virtually every fed meeting for a year or 18 mos can have a pretty drastic impact on the economy.

[Ardentfrost]

Originally Posted by 6SpeedTA95

Greenspan made a few mistakes when he was the fed chairman, one of them was dropping rates so rapidly and to such a low point. The rate really never should have dropped below 2.25% some even argue 3.0% which also seems like a very valid and reasonable number. Then when rates began to rise they raised them too rapidly. It typically takes 90 days to begin to feel affects of rate changes and 6 months for the effects to really reach their peak. So making many adjustments at virtually every fed meeting for a year or 18 mos can have a pretty drastic impact on the economy.

1% change per year isn't THAT fast. He may have taken them too low, but his rate was historically sound. Plus, the fed chairman is only half of the equation. Fiscal policy is also something that could change that would better/worsen the economy. Less spending and less tax collection would allow the fed to stabilize the economy better, but trying to stave off inflation while promoting economic growth when all you can control is the interest rates for bank-to-bank transactions is damn near insanity. Greenspan tried to convince the gov't to spend less and allow more money back into the economy, but they refused and just borrowed more.

Ugh, I hate that we even have to speculate on the competency and effectiveness of a single man who has fairly major influence in our economy. A metallic monetary system would be so much better.