Another Federal Reserve Rate Cut
The Federal Reserve cuts interest rates again…
Coming just eight days after the Federal Reserve took unprecedented action by cutting its benchmark short-term interest rate by a hefty 0.75%, the Fed cut it again by half a percentage point to 3%, during a regularly scheduled meeting of its policy committee, a move it all but promised when it announced its extraordinary reduction on Jan. 22. The Fed hopes that the lowered rate, the lowest since 2005, combined with the previous four taken since September 2007, will promote moderate growth overtime.
Residential construction fell at a stomach-churning 23.9 percent annual rate. Troubles in the housing and sub prime market in the final three months of 2007, threatened the U.S. economy, slowing to an annual rate of just 0.6%, down significantly from 4.9% in the third quarter. The big concern is that consumers and businesses will cut their spending and investment dramatically, throwing the economy into a recession.
The latest move is a concerted effort by the nation’s central bank to alleviate fears of a possible recession amid pains in the housing market and to help restore Wall Street confidence. In explaining its action Wednesday, the Fed cited market turmoil, the housing slump and the clampdown on lending that has accompanied them. “Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.” the central bank noted in a statement.
Defenders said a potential stock market crash represented a threat to the economy that had to be addressed. While the central bank moves to push down the cost of money, Congress is considering emergency measures to help stimulate the economy. Legislation passed by the House of Representatives this week would give rebates to most taxpayers and boost the housing market by raising the size of mortgages eligible for federal guarantees.
Critics questioned whether the move was a gift to investors and a departure from the central banks mission to fight inflation and boost economic growth. A minority of economists argued that policy makers have left themselves unnecessarily alarmed by panicky swings in the stock market, according to The New York Times. If the central bank props up the economy with easy money, they warned, the result would be higher inflation in the future. The aggressive rate cuts could further open Fed to criticism that they are responding to the will of financial markets rather than doing what is needed to balance economic growth and low inflation, according to The Washington Post on Wednesday.
February 5th, 2008 at 11:28 am
[…] (on average) in the third quarter of 2007. Of course, this doesn’t take into account the most recent Federal Reserve rate cuts, but it’s a good sign of things to […]