(AFP) – Sep 18, 2007
WASHINGTON (AFP) — The Federal Reserve slashed its base federal funds rate by a half point Tuesday to 4.75 percent, in what analysts called a bold move to stimulate an economy imperiled by housing and credit market stress.
The Federal Open Market Committee, in a unanimous decision after a one-day meeting, also cut its discount rate for direct central bank loans by 50 basis points to 5.25 percent.
"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 FOMC said in a statement.
The statement said that despite "moderate" economic growth in the first half, tighter credit conditions create a "potential to intensify the housing correction and to restrain economic growth more generally."
The cut in the funds rate is likely to lead to a lowering of borrowing costs across the economy, for consumers and businesses alike. The Fed, which has not cut this rate since 2003, had held it at 5.25 percent since June 2006.
"I think the Fed delivered a healthy dose of monetary medicine to the economy and housing market," said Scott Anderson, senior economist at Wells Fargo.
"I think it will be viewed as an aggressive move by the Fed to avert an economic recession."
The policy-setting committee, which was forced to reconsider its tough monetary stand when financial markets were roiled by fears of a wider economic crisis, had been widely expected to cut interest rates.
But analysts had been divided on whether the central bank would move by a quarter point or a bolder 50 basis points. Some economists said a large cut might fuel inflation or bring back the easy-money conditions that created the problems.
The FOMC statement cited some improvement in inflation but added that "some inflation risks remain," and that it would "monitor inflation developments carefully."
The panel said developments in financial markets since the last regular meeting "have increased the uncertainty surrounding the economic outlook" and that it would "act as needed to foster price stability and sustainable economic growth."
The wording suggests the central bank is not promising further rate cuts but would wait to see if economic and credit conditions return to normal, said analysts.
"It's a signal that they'll assess the economic risks as the data come in," said Craig Alexander, deputy chief economist at TD Bank Financial Group.
"It may be the Fed does not want the market to price in a major easing cycle."
Avery Shenfeld, economist at CIBC World Markets, said that although the Fed is trying to send a message not to count on any more reductions, "I doubt the Fed is done. I think they are right and that the economy is softening."
Andrew Busch, analyst at BMO Financial Markets, said however that the rate cut is a rescue for those who "made poor credit decisions without the consequences of market discipline."
"Like a teenager with a car and no curfew, we'll be having more problems down the road from these actions. But for now, who cares? Everyone's happy and it keeps the politicians at bay," Busch added.
Stocks surged on the news, with the Dow industrials rallying 2.5 percent, while the dollar weakened. On the bond market, yields on long-term Treasuries were higher despite the rate cut.
"Bonds are acting in a way to raise long-term mortgage rates, not to cut them," said Robert Brusca at FAO Economics.
Morgan Keegan bond analyst Kevin Giddis said he found the Fed action "puzzling" in view of inflation risks.
"The long end of the bond market gets it," he said. "A cut that is this aggressive will likely lead to inflation and ultimately, a Fed tightening."
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