Fed Cuts Interest Rate to Boost Housing

[Dec 6, 2007.]

 

When the Federal Reserve Board cut its federal funds rate by a quarter of a percentage point, the goal was to correct the national housing slump. The rate decrease—the second in 6 weeks—is also designed to help keep recession at bay.

In its official statement, the Fed said, "The pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction."

The decision won the approval of Fed Chairman Ben Bernanke and all but one of his colleagues. The rate cut is significant because it impacts a number of other interest rates charged to consumers and businesses throughout the nation.

The ruling had an immediate impact—banks such as Bank of America decided to reduce their prime lending rate to 7.5% for credit cards, home equity loans, and other loans. The hope is that the rate cuts will encourage people to increase their spending, helping to revive the sagging economy.

The decision also had an immediate effect on the stock market. In fact, the Dow Jones Industrial Average soared more than 130 points in the wake of the news.

Officials at the Federal Reserve said that the recent rate cuts should help "forestall some of the adverse effects on the broader economy" arising from the national housing crisis and the credit crunch. The Fed could cut a key interest rate again in December, but some economists believe the move is unlikely.

Interestingly enough, the economy expanded by 3.9% in the third quarter, the fastest rate in more than a year. Fed officials called the economic performance "solid" in the summer. They also observed that "strains from financial markets have eased somewhat on balance." Still, economic growth is expected to stagnate this quarter. An expansion of only about 2% or even less is predicted. That could lead to an unhappy holiday season for retailers this year.

Julie Ann Amos
December 6th 2007

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