Sept. 18 (Bloomberg) -- The Federal Reserve lowered its benchmark interest rate by a half point to 4.75 percent, the first cut in four years, hoping to keep the U.S. from sinking into a recession sparked by fallout from the housing-market collapse.
``Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets,'' the Federal Open Market Committee said in a statement after meeting today in Washington. The central bank will ``act as needed to foster price stability and sustainable economic growth.''
Stocks surged after the larger-than-forecast reduction, a move that signals Chairman Ben S. Bernanke will act aggressively to counter the risk of an extended economic slowdown. He may also leave himself open to criticism that he's rescuing investors from bad decisions.
``Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction, and to restrain economic growth more generally,'' the FOMC said.
Core inflation has improved ``modestly'' this year, while some risks remain, the Fed said. The decision was unanimous.
Change in Direction
The federal funds rate, which banks charge each other for loans, had stood at 5.25 percent since June 2006. That's when the Fed ended a two-year run of increases that lifted the rate from a four-decade low of 1 percent.
Most economists anticipated a quarter-point, and traders pared bets on a bigger move in recent days as some Fed officials signaled they would be reluctant to back a half-point cut.
``We see more cuts ahead,'' said David M. Jones, chief executive officer of DMJ Advisors in Denver and a former Fed economist. ``They have to rebuild confidence, both in terms of lenders and Main Street.''
The Fed's Board of Governors also lowered the rate on direct loans to banks by half a percentage point to 5.25 percent.
The Fed first reduced the so-called discount rate by a half point on Aug. 17 in a surprise move to restore confidence after some companies found it hard to obtain funds as investors fled riskier assets. The credit crunch was caused by losses in securities tied to subprime mortgages.
The half-point reduction in the federal funds target was forecast by 23 of 134 economists surveyed by Bloomberg News. One hundred and five predicted a reduction of 25 basis points while six forecast no change. A basis point is one-hundredth of a percentage point.
Foreshadowing Action
Investors began anticipating a reduction on Aug. 9, a week before the Fed made the initial discount-rate cut and said risks to growth have ``increased appreciably.'' Two weeks later, Bernanke said in a speech that the central bank would ``act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets.''
The decision comes two days before Bernanke faces lawmakers in a House Financial Services Committee hearing on the mortgage- market crisis. Representative Barney Frank, the Massachusetts Democrat who heads the panel, on Sept. 7 called for a ``meaningful'' rate cut by the Fed.
Policy makers were forced to shift their focus to growth from inflation in August as rising defaults on subprime mortgages rippled through global credit markets. Asset-backed commercial paper contracted by the most in at least seven years and Countrywide Financial Corp., the biggest U.S. mortgage company, was shut out of the market.
Bigger than I expected ... I hope it isn't just pushing on a string.
If a tree falls in a forest and lands on a politician, even if you can't hear the tree or the screams, I'll bet you'd at least hear the applause. Paul Tindale
1/2 a point is definitely good news for all. Now they just need to put the squeeze on lender practices, and tie a weight to the life ring for the "investors". These guys need no help. Their rise or fall is on them, and none deserve any help. After all, they don't give Uncle Sam any "excess profits" above and beyond what they are normally taxed at. Ain't the American way great?!?
Well, not quite all. This does no good for and does do harm to those with savings accounts and other investment instruments such as CDs with interest rates that are tied to the Fed Funds Rate. They will see a corresponding half point drop in their interest rate.
We're due for a major financial reckoning that's going to hurt a lot, I fear.
When you add together massive deficits, lower government revenues, increased expenditures, weakening dollar, sub-zero savings rate, no manufacturing base, and the current mortgage crunch, it starts seeming like a "correction" is a foregone conclusion.
