Federal Reserve & Interest Rates

The Federal Reserve cut interest rates Tuesday, January 22, 2008, just days ahead of the scheduled meeting set for the very end of the month.

The rate cut was ¾ of a point, making the current rate 3.5%.  This sizeable rate reduction is the biggest cut in a little over two decades.  The discount rate, the rate banks are charged by the Fed for borrowing, was also reduced to 4%, another 75-basis-point decrease.

According to the Fed’s statement, this action was taken “in view of a weakening of the economic outlook and increasing downside risks to growth.”  This urgent reaction was a result of reports showing continued deterioration in the broader financial markets and “a deepening of the housing contraction as well as some softening in labor markets.”

The FOMC statement also reported continued concerns about inflation and other downside risks to the nation’s economic growth.  The Fed intends to keep a close eye on inflationary pressures in the coming months.

Economists say the moves looks like a panicked decision.  Some say the Fed action is revolving around changes in the market.  In the midst of market turmoil, it seems the move was primarily a rescue. The last several rate cuts have been criticized as moves to favor investors.  The Chairman, Ben Bernanke, has defended the actions in previous months to be in favor of long-term economic growth.

Standard & Poor 500, as well as the Dow fell 1.1% today.  This was a modest decline after a weak opening.  News of the rate cut certainly encouraged investors.  On the global markets Asian stocks plummeted steadily and Brazil hot up 4%.

Analysts are split as to whether or not the Fed intends to make additional cuts at the scheduled meeting on the 29th.  It is possible that we see another rate reduction next week.  Recession continues to loom as a dark hovering cloud over the economy.