Fed Cuts Interest Rates To 4.75 Percent
(CBS News) WASHINGTON The Federal Reserve announces it is cutting its federal funds rate by a half-point to 4.75 percent, the first reduction in this key rate in four years.
The Fed is widely expected to cut its target for the federal funds rate, the interest that banks charge each other, on Tuesday for the first time in four years.
Fed Chairman Ben Bernanke, facing his first major test since taking over from Alan Greenspan in early 2006, has been sending signals that he is prepared “to act as needed” to cushion the impact on the economy from the market turmoil.
A change in the funds rate, now at 5.25 percent, is reflected immediately in banks’ prime lending rate, the benchmark for millions of consumer and business loans. The prime rate is currently at 8.25 percent.
Most economists are predicting that Bernanke and his colleagues will choose to reduce the federal funds rate only by a quarter point although a few economists see the chance for a bolder half-point move. But analysts agreed that whatever the Fed does on Tuesday will likely not be the last word on the subject.
Many economists are predicting a string of three or more rate cuts as the central bank works to calm financial markets and keep the worst slump in housing in 16 years from pushing the country into a recession.
“We have a very soft economy and if the Fed doesn’t lower rates then the economy could fall into a recession,” said Mark Zandi, chief economist at Economy.com.
Zandi has trimmed his forecast to show economic growth of around 2.5 percent in the current quarter, down sharply from 4 percent growth in the April-June quarter. He said the fourth quarter is likely to be even weaker at around 1.5 percent.
Oil prices climbed to a new high, above $81 a barrel, on expectations of cuts to the federal funds rate later Tuesday, a measure that has the potential to bolster the economy and strengthen petroleum demand in the world’s largest energy consumer.
Light, sweet crude for October delivery rose as high as $81.24 a barrel in electronic trading on the New York Mercantile Exchange. It has since retreated to $80.73, still up 16 cents midday in Europe.
The contract settled Monday at a record close of $80.57, up $1.47.
The slump in housing that began last year has sent delinquencies on subprime mortgages, loans make to people with weak credit histories, soaring to record levels. The problems with rising mortgage delinquencies have developed into a serious credit crunch as investors have grown worried about other types of loans, a development that has roiled stock and bond markets around the world.
All of this turmoil has forced a radical about-face at the Fed since its last meeting on Aug. 7. At that time, the Fed left the funds rate unchanged and declared that its predominant concern was still that inflation would fail to moderate as expected.
However as conditions in financial markets grew more turbulent, the Fed began aggressively pumping extra cash into the banking system and on Aug. 17 announced a surprise half-point cut in its discount rate, the interest that it charges to make direct loans to banks.
In explaining the August move, Fed officials did not mention inflation at all and instead said that “the downside risks to growth have increase appreciably.”
Private forecasters said that worry is not misplaced, given that all but two of the housing downturns that have occurred since the end of World War II have been accompanied by recessions.
“You get as big a decline in housing as we are looking at and that is serious business,” said Lyle Gramley, a former Fed governor and now an analyst at Stanford Financial Group in Washington. “I think we will escape a recession, but just by the skin of our teeth.”
In one jarring note, employment fell in August by 4,000, the first outright decline in four years, with manufacturing and construction leading the job losses.
But economists said they believed that Bernanke, who wrote extensively as an economics professor on the Great Depression that followed the 1929 stock market crash, understands what needs to be done to avert downturns.
“We have had a long history of financial panics and if we have learned anything, it is that you shove money at them,” said David Wyss, chief economist at Standard & Poor’s in New York.
While some have complained that Bernanke has been more tentative than Greenspan would have been, no less an authority than Greenspan disagrees.
Doing a round of interviews to promote his new book, Greenspan, who was Fed chairman for 18½ years, said Bernanke was “doing an excellent job” and he doubted that he would have done anything differently.
Greenspan told The Associated Press that the odds of a recession have grown since earlier this year, even though “the economy is not doing badly at this stage.”
He put the odds of a recession at greater than one in three. “But best I can judge it is less than 50 percent,” he said.
Greenspan’s one-in-three prediction earlier this year rocked Wall Street.
This won’t do a thing to help the housing market at all. The banks already made it clear that they don’t want to deal with Jumbo loans anymore and most likely won’t lower their rates.
Zandi was overly optimistic a year ago. And now he’s overly pessimistic:
“We have a very soft economy and if the Fed doesn’t lower rates then the economy could fall into a recession,” said Mark Zandi, chief economist at Economy.com.
Could he have a conflict of interest if some of his corporate clients stand to benefit from a bail out (in the form of lowered short-term interest rates)? I’m not happy that the Fed has bowed to pressure from the whiners at Wall Street (and their consultants, like Zandi).
I remember now that Economy.com was purchased by Moody’s some time back. Moody’s is responsible for giving AAA ratings to MBS (essentially junk), that many pension funds, and other institutional investors, ended up buying. It turned out that Moody’s, like S&P, had a tremendous incentive to give prime ratings to junk bonds.
And now Mark joins the chorus of whiners asking for (and getting!) a bailout. Disgusting.
The US Dollar index is now marching towards 79, oil has broken out north of 80, gold is north of $720, the yield on the 10 yr actually went up after the announcement. I hope these guys know what they are doing.
This won’t do a thing to help the housing market at all.
Hey guys, BB didn’t drop the rates in order to save the housing sector. His concern is that the current credit crunch could adversely affect overall confidence and make a economy-wide recession more likely. So, the Fed lowered rates to prop up the general economy. BB, who has a respectable academic background, couldn’t care less about housing. He’s concern is preventing the unemployment rate from getting too high.
