In a surprise move today, the Federal Reserve cut the benchmark interest rate by three quarters of a percentage point–the largest single
reduction since the Fed began using the rate as the main
monetary policy tool about 18 years ago, according to Bloomberg.
The Fed Board of Governors also approved a 75-basis-point decrease in the discount rate today, bringing it to 4 percent.
The target overnight lending rate dropped to
3.5 percent from 4.25 percent. Although a rate cut was widely anticipated this month, the Fed wasn’t scheduled to meet until next week–and hardly anyone expected one this big. The Fed hasn’t given an emergency cut since 2001.
What gives? A little bit of panic, for the most part.
"Broader financial market conditions have continued to
deteriorate and credit has tightened further for some businesses
and households,” the Fed said in a statement in Washington. "Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."
Did it ever.
The subprime fallout continues to affect the U.S. housing market and residential sectors in the U.K. and other companies; building companies (isn’t that right, Wolseley) and financial systems around the world. Reports Tuesday indicated China’s state-owned banks may announce U.S. mortgage fallout damage soon.
Thus, the Fed was willing to–for now–forget inflation (previously
given as the reason the Fed didn’t cut rates until September) because
of the recent poor retail, unemployment and stock market news.
But the timing–well, that was a surprise. Coming just a week after President Bush announced plans to create an economic stimulus package–which, still under formation, has been met with questioning from critics who feel it won’t help in the long term–the Fed announcement conveyed a sense of urgency the central bank has yet to express about the status of the economy. Sitting tight is a thing of the past for the Fed, it seems.
I got off a plane today to find I had a message from a mortgage broker I’d talked to months ago while pricing refinancing options–excited about the rate cut, he called to see if I’d gone through with the refi with someone else or if I would be interested in talking about my options.
It’s been a couple of months since I touched base with him. I’m not sure if his call indicates how truly big the new is (no other brokers called me after previous cuts this year) or if the broker digging out old client leads and calling me after two months indicates that the Fed’s right–things really have slowed down enough to warrant a huge cut.
Will the rate cut give our economy the boost it so desperately needs to prevent a recession? Or will it provide an all-too-temporary shot in the arm, as many of the Bush plan opponents fear?
Speak out! What do you think will reinvigorate the economy? Post your thoughts below.