Associated Press
March 18, 2008
WASHINGTON - The Federal Reserve on Tuesday slashed a key interest rate by three-fourths of a percentage point, moving aggressively to contain a credit crisis threatening to push the country into a severe recession.
The latest action brought the federal funds rate - the interest that banks charge each other - down to 2.25 percent, the lowest point since late 2004. It marked the second back-to-back cuts of three-fourths of a percentage point.
Fed Chairman Ben Bernanke and his colleages have now cut the funds rate six times since last September, with the reductions becoming more aggressive since January as the central bank has faced growing turmoil in global financial markets.
In Jacksonville, Fla., Tuesday, President Bush said the government will take further action - if necessary - to help the sagging economy.
The stock market had anticipated a cut and the Dow Jones industrial average jumped over 300 points ahead of the announcement. But the Dow dropped about 100 from its high for the day after the Fed failed to cut rates by a full point, which many had expected.
The Fed's target for the federal funds rate, the interest that banks charge each other on overnight loans, stood at 3 percent before the move, and was at 4.25 percent at the beginning of this year.
Markets posted strong gains before the Fed announcement after Lehman Brothers (nyse: LEH) and Goldman Sachs (nyse: GS - news - people ) reported better-than-expected results for the first quarter.
Federal Reserve Chairman Ben Bernanke and his colleagues have already been working overtime, employing a variety of novel approaches to keep the economy out of a recession or at least moderate the impact of any downturn.
Treasury Secretary Henry Paulson made the rounds of the morning TV shows Tuesday to underscore the administration's commitment to keeping turmoil in the financial markets from worsening a struggling economy.
"The priority we have is a stable, orderly financial" market, he said on CBS' "The Early Show.
He said the focus of policymakers "is reducing the spillover into the real economy from the turbulence and disruptions in our financial markets."
To those who would complain that the administration is more interested in bailing out Wall Street than struggling homeowners, Paulson said the thousands of Bear Stearns (nyse: BSC) employees likely to lose their jobs and life savings, and thousands of shareholders who have lost billions because of the company's collapse, probably do not feel like they have been bailed out.
A cut in the funds rate will translate immediately into lower rates for consumers and businesses as banks cut their prime lending rate by a similar amount.
"There is no reason for the Fed not to be aggressive," said Mark Zandi, chief economist at Moody's (nyse: MCO) Economy.com. "The economy is in a recession, the financial system is in disarray and inflation is low."
However, a report Tuesday showed that wholesale prices rose by 0.3 percent in February, driven higher by rising energy costs.
Outside of food and energy, core inflation jumped by 0.5 percent, the biggest increase in 15 months and a possible sign that the relentless increase over the past two years in energy costs is making its presence felt in other sectors of the economy.
At the moment, Fed officials have said they are more concerned about weak growth than inflation. Another report Tuesday showed that problems in the housing industry continue, with construction of new homes falling by a bigger-than-expected 0.6 percent and applications for new building permits dropping to the lowest level in 16 years.
Source: Reuters
Fed Cuts Rates by 3/4 Percentage Point
