Fed cuts rates by 75 basis points! Fed funds rate now at 3.5%.
The Fed also lowered its discount rate by 75 basis points to 4%.
This is an emergency inter-meeting rate cut. The first since 9/11/01. They made the cut this morning and left the door open for more cuts later this month. It will take some time for this to work its way through the economy, but it likely means the recession will be shorter and less painful than it otherwise might have been.
Now how will the markets react?
U.S. stocks opened with huge losses. The Dow Jones Industrial Average was down more than 450 points, or more than 3%. Treasurys rallied.
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Fed Makes Another Cut
Andrew Farrell, 01.22.08, 9:12 AM ET
The Federal Reserve took the unusual step of an inter-meeting rate cut Tuesday morning as financial turmoil worsens.
The Federal Open Market Committee announced that it was cutting its federal funds target rate by 75 basis points to 3.5%. It was the first federal funds rate cut between meetings since September 2001.
"The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth," said the Fed. The Fed also left room open for a further rate cut when it meets at the end of this month.
The emergency rate cut follows a worldwide sell-off of stocks. Foreign exchanges closed sharply lower Monday as investors grow increasingly worried that the U.S. could be on track for recession.
U.S. exchanges were closed Monday but were set to play catch-up on Tuesday. Futures trading pointed to sharply lower opens for each of the three major exchanges despite the rate cut.
The cut comes as financial players reveal deeper and deeper injuries from roiled mortgage and credit markets. Wachovia (nyse: WB - news - people ) and Bank of America (nyse: BAC - news - people ) both announced fourth-quarter earnings Tuesday that plummeted from a year ago.
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Fed cuts rates 75 basis points in emergency move
By Rex Nutting, MarketWatch
Last update: 9:36 a.m. EST Jan. 22, 2008
WASHINGTON (MarketWatch) -- Hoping to halt a market meltdown and prevent a recession, the Federal Reserve lowered its overnight lending rate by three quarters of a percentage point to 3.50% on Tuesday in a rare move between formal meetings.
The 75 basis-point surprise cut came after global financial markets sold off in dramatic fashion on Monday on fears that bad bets in credit markets could spread further and drive the U.S. economy into recession. See full story on London markets.
"The committee took this action in view of a weakening economic outlook and increasing downside risks to growth," the Federal Open Market Committee said in a statement. Read the text of the statement.
The Fed also lowered its discount rate by 75 basis points to 4%.
It was the largest cut in the federal funds rate since 1982, after the FOMC had driven rates to 20% to kill inflation.
U.S. stocks opened with huge losses. The Dow Jones Industrial Average was down more than 450 points, or more than 3%. Treasurys rallied.
"This move is not an instant fix," wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics. "The economy is still staring recession in the face, but at least the Fed now gets it."
With the move coming just eight days before the next scheduled meeting, "there can be no doubt that the timing of this morning's move is aimed at supporting global financial markets after yesterday's global equity meltdown," wrote Joshua Shapiro, economist for MFR Inc.
Some traders said the Fed's move sniffed of panic. "I think that there's an element of thinking that, if the Fed is so worried that it is cutting rates, then that is feeding into fears that the U.S. economy is in really bad shape," said David Page, a strategist at Investec Securities in London.
After a conference call Monday evening among the 10 voting members of the Federal Open Market Committee, the FOMC released a statement early Tuesday saying downside risks to growth remain. One member of the committee, William Poole, president of the St. Louis Fed, voted against the move. One other, Fed Gov. Frederic Mishkin, was absent.
"While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households," the FOMC said.
"Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."
"Appreciable downside risks to growth remain," the statement said. "The committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."
The statement barely mentioned inflation, only saying that the FOMC expects inflation to moderate and will monitor inflation carefully.
As expected, the Bank of Canada cut its key overnight rate by quarter percentage point to 4% at its regularly scheduled meeting.
By cutting rates now instead of waiting a week, the FOMC showed that it's much more concerned about the financial markets and the economy slipping into recession than it was just a month ago, when the committee cuts its target for the federal funds rate by a quarter percentage point to 4.25%.
Over time, rate cuts should stimulate economic growth by making it cheaper to borrow money for consumption or investment. Banks typically lower their prime lending rate for their best customers in lockstep with the Fed. Many consumer and business loans, however, are based on interest rates set in competitive markets, which may or may not follow the Fed's lead.
The Fed has now lowered interest rates by 1.75 percentage points since Sept. 18.
The rate cut wasn't a complete surprise to markets that have been anticipating aggressive rate cuts from the U.S. central bank, though the timing of any inter-meeting rate cut was uncertain.
On Jan. 10, Fed Chairman Ben Bernanke had signaled the Fed's willingness to act boldly when he said it would "remain exceptionally alert and flexible" and was prepared "to take substantive additional action as needed to support growth."
"The rationale for this move today was in Mishkin's speech a week-and-half ago, which argued that at times of severe financial turmoil, policy had to be '"timely,' 'decisive,' and 'flexible,'" wrote John Ryding, chief U.S. economist for Bear Stearns.
It was the first time since Sept. 17, 2001, that the Federal Open Market Committee had changed the federal funds target rate outside of a regular meeting.
The next meeting is scheduled for Jan. 29 and 30. Markets anticipate another rate cut, possibly a half-point cut, at that time.
"The next move or moves depends on the financial markets more than the economic data," wrote Roger Kubarych, an economist for UniCredit Market |
