Another Federal Reserve Rate Cut
Federal Reserve cuts interest rates for the thrird time this year…
The Federal Reserve cut it’s key interest rate by a quarter point to 4.25% yesteday. Since Sept. 18, the central bank has lowered the federal funds rate, the interest rate that commercial banks charge each other on overnight loans, by a combined 1 percentage point. After cutting the federal funds rate by a half-point on Sept. 11 and a quarter-point on Oct. 31, the Fed hinted that those two reductions might be enough to stabilize the financial markets and beat back the threat of a recession. But the Feds latest meeting implies otherwise…
Tuesday’s quarter point cut was intended to fortify the economy against a credit crunch, lower hiring rates and sagging housing market, but was viewed (by many) as too small to stimulate the economy and head off a recession. After beginning the day up, the Dow Jones industrial average fell as soon as the Fed’s decision was announced. The U.S. blue-chip index ended the day at 13,432.77, down 294.26 points, or 2.1%. The broader S&P 500 fell 2.5%. However, commercial banks’ prime lending rate, the benchmark for millions of consumer and business loans, will drop by a corresponding amount to 7.25% giving borrowers a bit of breathing room.
“They now believe the dysfunctional credit markets present more risk to the economy and the financial system than anything found in the economic or inflation statistics,” economists at Wachovia wrote in a note to clients. “For the time being, the Fed will focus on righting the financial markets and making sure there is enough stimulus in place to offset the tightening in credit markets and ongoing unraveling of the housing market,” they said.
Still, the Fed left the door open for additional rate cuts at subsequent meetings. Paul-André Pinsonnault, senior fixed-income economist at National Bank Financial, contends the Fed will bring down the fed funds rate to 3% by next summer, implying several more cuts during the next half year. In a bried statement, the Fed said that “readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation.” In this context, the Fed judges that “some inflation risks remain,” and it will continue to monitor inflation developments carefully.
