The Housing Chronicles Blog: Fed cuts interest rates again

Wednesday, January 30, 2008

Fed cuts interest rates again

As expected, the Federal Reserve cut its key interest rate by half a percentage point to 3%. From an L.A. Times article:

The Federal Reserve cut its key interest rate another half point to 3% today, completing a wild eight-day run during which the central bank slashed the rate more than at any time since 1990 in an effort to stave off recession and what it fears could be an economy-damaging credit crunch.

Coupled with its three-quarters-of-a-point cut on Jan. 22, the Fed has now sliced its signal-sending federal funds rate, the interest that banks charge each other for short-term loans, by 1.25 percentage points in a little over a week and 2.25 percentage points since it began the current run of rate cuts in September. And policymakers suggested today that they were prepared to cut still deeper if necessary...

In a statement explaining their latest move, Fed policymakers cited financial market conditions as remaining "under considerable stress" and warned that "credit has tightened further for some businesses and households." They also said that "recent information indicates a deepening of the housing contraction as well as some softening in labor markets."

Analysts said that policymakers' focus on markets indicated the extent of their concern about a financial freeze-up. Usually, the central bank goes to some length to avoid appearing to be responding directly to markets and investors, and instead emphasizes its attention on the broader economy.

But policymakers have apparently decided that the combination of the sub-prime mortgage mess, a housing contraction and the repeated incidents of credit freezes pose a sufficiently serious danger to growth that they have to act decisively to reverse current trends.

"This is certainly an aggressive move by the [policymaking] Federal Open Market Committee," said Gregory Hess, an economist, former Fed staffer and dean of the faculty at Claremont McKenna College. "It appears that given the situation they see unfolding, they've decided to put their concerns about growth ahead of any concerns about inflation," he said.

Still, not everyone agrees with the move:

"I think the Fed is bonkers," said Allan Meltzer, an economist at Carnegie-Mellon University who is writing the definitive history of the central bank. Fed policymakers "frequently swear to themselves and each other that they are not going to ease [interest rates] excessively and then the economy slows a little and they do just that," Meltzer said.

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