Fed cuts rates in emergency 1/22/08
WASHINGTON (MarketWatch) - Hoping to prevent a market meltdown and recession, the Federal Reserve lowered its overnight lending rate by 75 basis points to 3.50% on Tuesday in a rare move between formal meetings.
The cut came after global financial markets sold off in dramatic fashion on fears that bad bets in credit markets could spread further and drive the U.S. economy into recession. See full story on London markets.
It was the largest rate cut by the Fed since the early 1980s.
After a conference call Monday evening among the 10 voting members of the Federal Open Market Committee, the FOMC released a statement saying downside risks to growth remain. One member of the committee, William Poole of St. Louis Fed, voted against the move.
"The committee took this action in view of a weakening economic outlook and increasing downside risks to growth," the Federal Open Market Committee said in a statement. See full story.
"While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households," the FOMC said. "Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.
"Appreciable downside risks to growth remain," the statement said. "The committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."
By cutting rates now instead of waiting a week, the FOMC showed that it's much more concerned about the financial markets and the economy slipping into recession than it was just a month ago, when the committee cuts its target for the federal funds rate by a quarter percentage point to 4.25%.
Over time, rate cuts should stimulate economic growth by making it cheaper to borrow money for consumption or investment. Banks typically lower their prime lending rate for their best customers in lockstep with the Fed. Many consumer and business loans, however, are based on interest rates set in competitive markets, which may or may not follow the Fed's lead.
The Fed has now lowered interest rates by 1.75 percentage points since Sept. 18.
The rate cut wasn't a complete surprise to markets that have been anticipating aggressive rate cuts by the Fed, although the timing of any intermeeting rate cut was uncertain.
On Jan. 10, Fed Chairman Ben Bernanke had signaled the Fed's willingness to act boldly when he said it would "remain exceptionally alert and flexible" and was prepared "to take substantive additional action as needed to support growth."
It was the first time since Sept. 17, 2001, that the Federal Open Market Committee had changed the federal funds target rate outside of a regular meeting.
The next meeting is scheduled for Jan. 29 and 30. Markets anticipate another rate cut, possibly a half-point cut, at that time.
