Emergency Rate Cut to Help Stimulate Economy
Federal Reserve lowers the Fed Funds Rate by a half point…
In a move meant to stimulate the U.S. economy, the Federal Reserve unanimously voted to make an emergency rate cut, dropping a key lending rate by half a percentage point. By lowering the Fed Funds Rate, the interest rate banks charge on overnight loans, to 1%, the Fed hopes to revive an economy hit by the most severe financial crisis in decades. Due to a dramatic increase in direct loans to banks in an effort to break the grip of the credit crisis, the Fed also lowered the Federal Funds Discount Rate, the interest it charges to make direct loans to banks, by a half-point to 1.25%.
In a brief statement explaining the action, the Fed said that the “intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and business to obtain credit.” Federal Reserve Chairman Ben Bernanke pledged in a speech earlier this motn that they would “monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability and will not stand down until we have achieved our goals of repairing and reforming our financial system and restoring prosperity.”
The Fed’s action was the second reduction this month; the first being a coordinated effort with foreign central banks on October 8. The last time the rate fell this low was in 2003 and has not been lower since 1958, when Dwight Eisenhower was president. Rate cuts take approximately 9 months to work their way through the economy, so the effects won’t be known until the summer of 2009. In its statement, the Fed indicated it had room to lower rates because the spreading economic weakness was lowering the risks that inflation would get out of control. Indeed, the weakness has caused dramatic declines in the price of oil and other commodities. The cut is expected to be followed by commerical bank reductions in their prime lending rate.
Analysts offered mixed opinions on future cuts. Some forcast that the Fed will not stop at 1% and seek further cuts while others believe that with the rate so low the Fed will hold at 1%. While many economists believe the country has already fallen into a recession, they think the aggressive efforts by the Fed to cut rates and take other actions to unfreeze credit markets will keep the country from plunging into a prolonged and deep downturn.
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