Fed Cuts Interest Rate

Posted on January 22, 2008

The Fed made a three-quarter percentage-point cut in the target for the federal-funds rate, in response to the stock market's early tumble.

The move shored up confidence, at least for the moment. U.S. and many global markets quickly rebounded from huge losses in response to the three-quarter percentage-point cut in the target for the federal-funds rate, to 3.5%.
But in a sign that risks to the U.S. and global economy remain strong, the Fed hinted another rate cut next week is likely. The central bank's moves may be too late to stop the U.S. from entering recession, as many economists now forecast, but it may make one milder and shorter.
By acting so explicitly in response to market developments -- just a week before a scheduled meeting to decide on rates -- the Fed is running a risk. Investors may view the steps as panicky, undermining the goal of the rate cuts. And investors may come to judge the Fed's success narrowly, by how the stock market, rather than the economy as a whole, performs.
Still, Fed officials agreed on the emergency move during a videoconference call convened hastily Monday evening by Mr. Bernanke. It came after Mr. Bernanke spent Monday in the office, despite the national holiday, watching the fallout as Asian and European markets plummeted and consulting with aides. Futures markets Monday were predicting a 4% plunge Tuesday in U.S. stocks.

Fed chairman Ben Bernanke has reportedly been saying off the record that the economy in in much worse shape than he has been saying publicly, which is not terribly reassuring. The Dow was down 464 points this morning, but rallied to close down 128.11. After the interest rate cut, the European markets also rallied.

Usually a cut in interest rates will spur spending and house buying. But the housing market is in a free fall and foreclosures in California are rising at an alarming rate. Recession appears imminent, but it's too soon to tell how deep it will be.