THE FED
Fed cuts rates half a point, is open for more
Central bank says it will cut rates as needed to boost economy
By Greg Robb, MarketWatch
Last update: 4:52 p.m. EDT Oct. 29, 2008Comments: 318WASHINGTON (MarketWatch) -- The Federal Reserve on Wednesday slashed overnight interest rates and left the door open for more cuts -- all part of an effort to return confidence to investors so that a weak economy doesn't crater.
In its statement, the Federal Open Market Committee said it had unanimously decided to cut its benchmark target interest rate by a half of one percentage point to 1% and clearly signaled it was considering further cuts. This signal came in a statement saying that the main risk facing the economy was weak growth.
Any more rate cuts would bring the funds rate to its lowest level since July 1958.
Video: What The Fed Rate Cut Means
PNC Financial Chief Economist Stuart Hoffman says the Fed made the right move when it cut rates, but it will still be some time before the housing market stabilizes. (Oct 29)Today's move, which was expected, follows a series of initiatives by the Fed and the Bush Administration to push cash into frozen credit markets, hoping to spur lending. As a result, the Fed has doubled the size of its balance sheet in the past month. At the same time, the Treasury has begun acquiring stakes in major financial institutions.
In addition, the Fed agreed to buy commercial paper from non-financial companies for the first time since the Great Depression. The Fed has also introduced a new fund to assist money markets.
In their official statement, Fed officials said the pace of growth has slowed "markedly" and the extraordinary financial market stress could put the economy at greater risk.
Inflation had moderated and should move even lower, the Fed said.
The FOMC said it "will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."
Importantly, the Fed statement drew no line in the sand at the 1% funds rate target, raising the possibility that rates may move lower.
While the move raises lots of technical questions about having rates so low, many analysts said these matters are of less concern than ending the credit crunch.
The Fed's statement issued at the end of its two-day meeting was remarkable for its pessimism.
"The intensification of financial market turmoil is likely to exert additional restrain on spending, partly by further reducing the ability of households and businesses to obtain credit," the statement said.
On the other hand, the outlook for prices was quite benign, the statement said.
"In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability," the statement said.
Many economists say that the next big threat for the central bank could be deflation, where prices fall sharply. This can be just as damaging for an economy as inflation.
Former Fed governor Frederic Mishkin has called for the central bank to consider announcing a public floor below which it will not let the inflation rate fall.
How low can they go?
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the "downbeat" statement from the Fed caused him to pencil in another half-point rate cut at the Fed's next formal meeting on Dec. 16.
But John Derrick, director of research at the mutual-fund company U.S. Global Investors Inc., said he thought the Fed would hold steady at 1% for the foreseeable future.
Derrick said the Fed cut rates today simply to give the market a shot of confidence and the statement was just an accurate description of the near-term outlook. E-mail
Bernanke is turning Japanese I think he's turning Japanese I really think so...
http://www.youtube.com/watch?v=qb5Ii0iIcXo
- FDRAllOverAgain
With interest rates so low already, economist at RBS Greenwich Capital, said the rate cut was a "side-show" and that the main event is the aggressive new measures undertaken to shore up the crumbling global financial system.
Analysts see some improvement in credit markets, but not much. The important London interbank lending rate remains well above the Fed funds rate.
The Fed said it was confident that all of the government actions would restore the markets to health.
"Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth," the statement said.
Fed watchers have begun to discuss other extraordinary steps the Fed could take to help ease the stress in financial markets.
Scott Anderson, chief economist at Wells Fargo, said the Fed could directly purchase longer-term Treasuries, corporate bonds or mortgage-backed securities if the Fed funds rate cuts "don't do the trick" of lowering the average interest rate on corporate and consumer borrowing.
The Fed move comes 21 days after the global coordinated half-point rate cut with major central banks in Europe and Canada.
Earlier Wednesday, the central banks of China and Norway lowered their target rates.
Some analysts said today's rate cut would put pressure on the European Central Bank to follow suit next week. The Bank of England is also expected to cut rates again.
On the technical side, Fed officials also voted to lower the discount rate to 1.25%. This is the rate at which banks can borrow from the central bank.
Greg Robb is a senior reporter for MarketWatch in Washington.
Source: http://www.marketwatch.com/news/story/fed-cuts-rates-half-point/story.aspx?guid=%7B0966C29F-9945-4A76-A623-7AAA1FE038BB%7D&dist=msr_1
