Hoping to combat the ongoing financial crisis and what looks to most (though some still deny it) a recession, the Federal Reserve announced another rate cut, this one of 1/2 point. This fed rate cut brings the federal funds rate, the interest banks charge on overnight loans, to 1%, a rate last seen in 2003-2004.
The funds rate has not been lower since 1958, when Dwight D. Eisenhower was president.
The last fed rate cut was earlier this month, in an out-of-band move. That cut was also 1/2 point, and was a coordinated move with foreign central banks, on Oct. 8.
The vote on move was unanimous.
In a statement regarding the fed rate cut, the Federal Reserve said:
The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.
In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.
So, despite the fed rate cut, a somewhat inflationary move, the slowdown overall will keep inflation in check, is what the statement says.
Strangely, as yesterday the markets ran up 900 points in anticipation of a fed rate cut, the markets fell sharply after the announcement.
The problem with the fed rate cut, beside the fact that it's rapidly running out of room for more moves, is that the lack of lending is not a question of interest rates. Banks and financial institutions are simply reluctant to lend to businesses or consumers.
In fact, yesterday the White House said banks had to start lending. Things haven't changed since then, however.
The full text of the Federal Reserve's statement can be found here.
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Comments
#1 Fed Rate Cut
I am not sure if this rate cut from Fed may work. The main thing was the bailout. I am also wondering if this Rate cut is the last one? Will Fed cut rates below one percent?
#2 Fed Rate Cut Will Help The Economy
Fed rate cuts always have helped in the past is they have made more money and easy money available for the economy. So this rate cut should be beneficial. Yes the Federal Reserve is likely to go below one percent if need be in my opinion.