By FoxBusiness
Dunstan Prial and Ken Sweet
January 30, 2008
New York -- Forging ahead Wednesday with an aggressive strategy for warding off a feared recession, the Federal Reserve’s Open Market Committee cut interest rates again.
The central bank slashed its federal funds rate, the interest that banks charge each other, by a half point to 3%, the fifth time rates have been cut since September.
John Lonski, chief U.S. economist for Moody’s Financial Services, said putting the brakes on a skidding domestic economy appears to be the Fed’s top priority.
“The Fed might have some reservations right now on the inflation side,” he said. “But in the view of the Fed, the supply of credit and weakening financial system is a more dire problem.”
The threat of a recession has heightened in recent months as the U.S. fights through a housing slump and credit crunch, both fueled by a surge in foreclosures on homes purchased with subprime mortgages.
Now at 3%, some economists believe the funds rate could fall to 2.5% before the Fed stops easing.
Wednesday’s cut comes on the heels of last week’s surprise three-quarter-point cut which drove the funds rate down to 3.5%. It was the biggest reduction in this rate in more than two decades and the first emergency cut -- so-named because it came between regular meetings -- since shortly after the September 2001 terrorist attacks.
Federal Reserve Chairman Ben Bernanke and his colleagues announced the emergency cut after a turbulent day on world markets when investors fretted over how a U.S. recession might affect global growth.
“I think the knee-jerk reaction of 75 basis points last week was enough to stave off the problems in Europe, but it hasn’t alleviated the problems in the markets,” said John O’Donoghue, co-head of equities at Cowen & Co.
The Fed, he added, will continue to pursue its aggressive strategy “because they want to err on the side of protecting this economy.” Inflation can be dealt with later, he said, predicting that rates could go back up toward the end of 2008 or early in 2009.
While most economists called for a half-point cut, others argued for a quarter-point reduction in response to some better-than-expected recent economic data.
For example, word came on Tuesday that orders to U.S. factories for big-ticket durable goods jumped 5.2% in December, the biggest increase in five months, and demand in a key series that tracks business investment shot up at the fastest pace since last March.
That unexpected strength may be a signal that the current slowdown will not be as severe as first believed, although analysts cautioned against reading too much into one report.
Also closely watched is the broadest measure of economic health, the gross domestic product, but the figures announced Wednesday -- just hours before the Fed’s decision -- weren’t pretty.
The economy nearly stalled in the fourth quarter with a growth rate of just 0.6%, capping its worst year since 2002.
The Commerce Department's GDP report showed an economy that had deteriorated considerably during the October-to-December quarter as worsening problems in the housing market and harder-to-get credit made individuals and businesses more cautious in their spending. Fears of a recession have grown, even as inflation remained elevated.
Many analysts believe the GDP could fall into negative territory in the current January-March period. One definition of a recession is two consecutive quarters of falling GDP.
Worried about the possibility of a downturn, the House on Tuesday overwhelmingly approved a $146 billion economic stimulus bill. Passage in the Senate could be slowed by an effort to expand the measure.
Cowen & Co.’s O’Donoghue observed, “I don’t see 50 basis points adding steam to the economy; I think we need 50 basis points to save this economy.”
Source: FoxBusiness
Fed's FOMC Cuts Again, Slashing Key Rate by 0.5%
