Fed Cuts Interest Rate to Beat Recession

[Feb 1, 2008.]

The Federal Reserve Board has engaged in a proactive strike against recession by cutting a key interest rate.
The Fed nipped the rate by ¾ of a point. Fed officials are also hinting that additional rate cuts may be on the way.

The rate reduction came as a surprise to some, since it marks the largest one-day rate cut by the Fed since it slashed the discount rate by a full point in late 1991. At the time, the country was mired in a full-blown recession.
Economists say that the rate cut is not a quick fix. They say that recession remains a strong possibility, particularly in light of the nationwide mortgage crisis.

Not only did the Fed reduce the funds rate—it also opted to slice the discount rate, which is the interest charged to make loans to banks. The discount rate will also drop by ¾ of a point.

In response to the Fed's surprise move, banks have announced they'll be cutting the prime lending rate by ¾ of a percent. The prime lending rate is the determining factor in a number of business and consumer loans. As a result of the action, the prime lending rate is falling to 6.5%.

The Fed's action comes as global financial markets fell precipitously amidst concerns that the U.S. is on the brink of recession. In a prepared statement, the Fed said it chose to reduce the federal funds rate "in view of a weakening of the economic outlook and increasing downside risks to growth."

While strains in short-term funding markets have subsided a little, the Fed stated that "broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."

Julie Ann Amos
Febraury 1st 2008

Recent News

• Bank of America Posts Disappointing Income
  Corporate titan Bank of America is apparently falling on tough times. [1st February 2008]


• Calls to Mortgage Hotline Double
  The crisis in the mortgage industry is taking a toll on telephone lines, if a new report from a non-profit homeownership group is any indication.


• Market Shares of ARMs Fall
  Freddie Mac reports that the total market share of adjustable rate mortgages decreased last year to its lowest point since the year 2003.


• Profits Fall for Home Sales
  M & T Bank Corporation is reporting that 4th quarter profits fell 70% because of additional losses on home sales. [16th January 2008]


• Prospects for Recession Still Unclear
  The President of the Federal Reserve Bank of St. Louis says that it's still unclear whether the nation is headed for recession. [15th January 2008]


• Home Sales Dip in Late Autumn
  The number of pending U.S. home sales dropped slightly in November, according to the National Association of Realtors. The reading declined 2.6% to 87.6 from a revised October index of 89.9.[12th January 2008