Fed Cuts Interest Rates by a Half Point Amid Continued Signs of Sharp Cooling
A WSJ.COM News Roundup
WASHINGTON -- The Federal Reserve cut short-term interest rates by half a percentage point in an effort to jump-start the slowing economy.
"Consumer and business confidence has eroded further, exacerbated by rising energy costs that continue to drain consumer purchasing power and press on business profit margins," the Fed said. "Partly as a consequence, retail sales and business spending on capital equipment have weakened appreciably."
The Fed also maintained its stance that its chief concern is the threat of the economy stalling. "The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," the Fed said.
Wednesday's move was widely expected, coming on the heels of reports showing economic growth and consumer confidence at their lowest levels in several years. In fact, some observers thought the central bank might cut rates even more sharply.
Last week, Fed Chairman Alan Greenspan told a Senate panel that economic growth is "probably very close to zero."
The testimony all but ensured that the central bank would cut rates this week. Then, on Tuesday, consumer confidence was reported at its lowest level in four years. Investors in fed futures responded with bets that the central bank would end its two-day policy meeting with a half-point reduction. And some investors were hoping that a three-quarter point cut was in the offing.
For more information about monetary policy, see the Federal Reserve Monitor page.
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GDP Rises at Just a 1.4% Rate as Business Investment Declined Consumer-Confidence Plunge Cements Expectations That Fed Will Cut Rates
Greenspan Reverses His Course, Now Sees Room for Big Tax Cuts (Jan. 25)
Federal Reserve Policy Makers Are Facing Less-Fearful Times (Jan. 25)
More Rate Cuts Expected; Data Show Inflation Remaining in Check (Jan. 18)
Fed's Surprise Move Sparks Rally, Sets Off New Jitters About Economy (Jan. 4)
Wednesday's announcement lowered the Fed's target for the federal-funds rate -- which banks charge each other for overnight loans -- to 5.5%. The central bank also lowered the discount rate -- the price the Fed charges when it lends to banks -- by half a point to 5%.
Recent economic data indicate that the central bank's yearlong campaign of rate increases that ended in May had the intended goal of slowing economic growth. In fact, it appears that the Fed believes it may have gone too far, given that it has now cut rates by a full point in less than a month, something it hasn't done since December 1991. Earlier this month the central bank cut rates by a half point in an unusual move between policy meetings.
The Fed's latest survey of regional conditions, conducted in late December and early January, showed disappointing holiday sales and a shrinking manufacturing sector nationwide.
Retailers slashed prices to move Christmas inventory off store shelves. According to the Fed, "Nearly all districts reported lackluster retail sales growth during the holiday season." Automobile sales also were weak. The Fed also found cooling in the housing market and banks reporting slightly slower loan growth.
In a separate report, the Fed reported that industrial production fell in the fourth quarter -- the first negative reading since 1991, when the last U.S. recession was ending.
On Tuesday, the Conference Board reported that consumer confidence plunged to 114.4 in January from 128.6 in December as expectations about the economy darkened.
Wednesday morning the Commerce Department reported that fourth-quarter gross domestic product grew at just a 1.4% annual rate, its slowest pace in five years, as business investment fell for the first time since 1991. |
