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Fed Cuts Interest Rates 75 Basis Points

AP
January 22, 2008

The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, slashed a key interest rate by three-quarters of a percentage point on Tuesday and indicated further rate cuts were likely.

The surprise reduction in the federal funds rate from 4.25 down to 3.5 percent marked the biggest funds rate cut on records going back to 1990.

Federal Reserve Chairman Ben Bernanke and his colleagues took the action after an emergency video conference on Monday night, a day when global markets had been pounded by rising concerns that weakness in the world’s largest economy was spreading worldwide.

Despite the Fed’s bold move, Wall Street plunged at the opening. The Dow Jones industrial average was down 311.99 points in the first hour of trading.

In a brief statement explaining its move, the Fed said that “appreciable downside risks to growth remain” and officials pledged to “act in a timely manner” to deal with the risks facing the economy. The action was approved on an 8-1 vote.

Analysts said the fact that the Fed did not wait until its meeting next week to cut rates underscored the seriousness of the situation.

“The world’s stock markets are in meltdown so the Fed came in with an inter-meeting move to try to stop the panic,” Christopher Rupkey, senior economist at Bank of Tokyo-Mitsubishi.

The Bush administration, which had announced on Friday that President Bush supported a $150 billion economic stimulus package, said Tuesday that it was not ruling out doing more than the $150 billion proposal if necessary.

Many analysts said if the carnage continues in stock markets, the Fed will move to cut rates again at its Jan. 29-30 meeting.

“This move is not an instant fix,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics. “The economy is still staring recession in the face, but at least the Fed now gets it.”

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‘Fed may keep cutting interest rates’

Western Mail
January 23, 2008

There could be more interest rate cuts to come as the US Federal Reserve tries to head off recession.

Howard Archer of Global Insight said the prospect of a US recession suggests the Fed may keep cutting rates.

Yesterday’s surprise decision to cut US rates by 0.75% helped rally London’s FTSE-100 index, after £76bn had been wiped off its value on Monday. The index of leading shares closed 161.9 up at 5740.1, a gain of 2.9% after Monday’s 5.5% fall.

The Fed’s cut to 3.50% was its first emergency move since 2001 and the largest single reduction since 1984.

Mr Archer of Global Insight said “The Fed did not directly reference Monday’s global stock-market meltdown in its announcement, merely noting that ‘broader financial market conditions have continued to deteriorate’. It focused upon the weakening outlook for growth.”

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US rates ‘heading for 2.5% by the spring’

The Scotsman
January 23, 2008

American interest rates are set to tumble as low as 2.5 per cent by early spring as US policymakers battle to restore stability to a faltering economy.

Economists said they expected the Federal Reserve to have shaved another full point off borrowing costs by its scheduled April meeting.

The prediction came after yesterday’s surprise three-quarter-point cut to 3.5 per cent – a move that appeared to have only limited success in restoring investor confidence.

Bonds jumped sharply, with two-year notes falling to their lowest in nearly four years, as investors prepared for still more rate- cutting.

In London, the benchmark FTSE 100 index of Britain’s biggest companies closed 161.9 points or nearly 3 per cent higher at 5,740.1 following a rollercoaster session and the previous day’s 323-point battering.

Nigel Gault, chief US economist at forecasting body Global Insight, said the prospect of “at least a mild US recession” suggested the Fed was “far from done cutting rates”.

He added: “We now expect the Fed to cut another cumulative 100 basis points off interest rates. The next instalment will probably come at the formal meeting on 30 January – another 25 or 50 basis points. We would expect to hit 2.5 per cent by the April meeting.”

Yesterday’s decision to slash interest rates came a week before the US central bank’s regularly scheduled meeting, a sign that it acknowledges that the global financial situation is serious.

David Jones, chief economist at DMJ Advisors, said the Fed could move again between meetings, should conditions deteriorate further, and predicted the Fed would lower interest rates to 3 per cent by the end of March.

Earlier this month, leading investment bank Merrill Lynch said the US economy was already in recession.

Some analysts pointed to a panic move by the Fed, which is headed by chairman Ben Bernanke. Michael Metz, chief investment strategist at Oppenheimer in New York, said: “Unfortunately the Fed] have no power to reverse what in my opinion is the worst post-war recession.”

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