Another Fed cut: A rock ... Bernanke ... and a hard place
WASHINGTON -- The Federal Reserve pushed on with the most aggressive series of interest rate cuts in decades Wednesday, slicing a key rate by half a percentage point and signaling that more reductions are possible if housing and credit markets fail to revive.
Those actions followed an emergency meeting last week when the Fed slashed the federal funds rate, its key policy tool, by three-quarters of a percentage point. Since September, the Fed has cut the rate from 5.25% to 3% to ward off a possible recession. The 1.25-point cut over the past nine days is the steepest in such a short time period since at least the early 1980s and appears to be unprecedented in recent central bank history.
The Fed's policymaking Open Market Committee in a statement said financial markets were "under considerable stress" while credit had tightened for some businesses and households. It said the housing sector had worsened and pointed to "softening" in labor markets. Fed officials gave just a nod to inflation, saying that while they expect price pressures to ease in coming months, they will "remain vigilant."
The Fed softened its rhetoric a bit from previous statements, taking out an earlier reference to "appreciable" risks to the economy. But while saying its rate cuts should promote moderate expansion over time, it added that "downside risks to growth remain" and promised to "act in a timely manner as needed to address those risks." That suggests more rate cuts could be on the way.
The Dow Jones industrials, which jumped more than 200 points after the announcement, finished down 37.47 at 12,442.83. The dollar fell to a two-month low as traders worried more rate cuts could be on the way.
The Fed rate cut came as the Commerce Department reported that the economy very nearly stalled in the final months of last year. Gross domestic product, the broadest measure of goods and services produced in the nation, grew at a weak 0.6% annual rate in the fourth quarter of 2007, down from a 4.9% pace in the third quarter. The economy grew just 2.2% last year, the most anemic performance since 2002, when businesses struggled to recover from a recession. Consumer spending, more than two-thirds of the economy, is slowing.
The White House and Congress have jumped in as the outlook has deteriorated. The House on Tuesday passed a bipartisan stimulus bill containing about $150 billion of personal and business tax cuts. The Senate is working on its own version, including more generous unemployment benefits. In a speech Wednesday, President Bush prodded the Senate to quickly pass the House measure.
"Whatever the Senate does, they should not delay this package, they should not keep money out of your pocket," Bush said. "The sooner you get a check, the more likely it is" that the economy will start to revive.
While Fed rate cuts take months to work through the economy, consumers could see some near-term effects. The fed funds rate, what banks charge each other for overnight loans, is a benchmark for much consumer lending. As the Fed has moved, the average rate for a variable-rate credit card has fallen to 13.1% from 14% in September, according to Bankrate.com. Wednesday's action will push that down more. Big losers will be savers who rely on certificates of deposit for income.
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