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Fed Slashes Rates To Curb Market Worries
By admin | January 22, 2008
-From cnn
NEW YORK (CNNMoney.com) — The Federal Reserve slashed two key interest rates by three-quarters of a percentage point Tuesday following an unscheduled meeting, citing continued concerns about a weakening economy and turmoil in the financial markets.
The Fed lowered its federal funds rate, which impacts how much consumers pay on credit card debt, home equity lines of credit and auto loans, to 3.5 percent from 4.25 percent.
The rate cut came more than a week before the Fed’s next regularly scheduled meeting, a two day session that concludes on Jan. 30. Some market observers think the Fed will cut rates again at this meeting.
The Fed also lowered its discount rate, which is what it costs banks to borrow directly from the central bank, by three-quarters of a point, to 4 percent.
This was the biggest rate cut by the Fed since October 1984. And it was the first cut between regularly scheduled meetings since a half-point cut on the day the market reopened following the September 2001 terrorist attacks
“Broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets,” the Fed said in a statement.
Treasury Secretary Henry Paulson, speaking at the U.S. Chamber of Commerce in Washington Tuesday morning, said that he hoped the rate cut would restore some confidence in the financial markets and U.S. economy.
“I think it’s very constructive and what I think it shows to this country and to the rest of the world [is] that our central bank is nimble and able to move quickly,” he said.
Investors didn’t appear to share this sentiment. Stocks plunged at the open Tuesday morning, following two straight days of massive selloffs abroad. But stocks bounced off their lows as the morning progressed.
“You can get into a debate as to whether we’re in a recession or not, but it’s a really turbulent period right now and that makes it difficult for investors to figure out what to do,” said Phil Dow, director of equity strategy with RBC Dain Rauscher.
Dow said the rate cuts are a welcome sign that should eventually help to stabilize the markets but he cautioned that stocks, particularly beaten down financial services companies, could still see more pain.
Along those lines, Rich Yamarone, chief economist with Argus Research, added that the Fed may be hitting the panic button, “There is no economic reason that the Fed couldn’t wait until next week to cut rates,” he said. “Something bigger is looming.”
Yamarone suggested that the Fed might be worried that the problems facing banks and mortgage lenders are going to get worse very soon.
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February 6th, 2008 at 9:07 pm
I don’t think it is working though. At least it is not curbing the worries anyway.