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

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