Fed cuts interest rate 3/4 of a point

steelbeam · 01-22-2008, 01:43 PM

The Federal Reserve unexpectedly slashed a key interest rate by a bold three-fourths of a percentage point on Tuesday, responding to a global plunge in stock markets that heightened concerns about a recession. The Fed signaled that further rate cuts were likely.

waltky · 01-26-2008, 12:59 AM

Downside to interest rate cuts...

The darker side of interest rate cuts
January 25 2008: Markets like the Fed cuts and expect more. But lower interest rates could keep the dollar weak and ultimately threaten economic growth.

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Interest rates are headed lower. But how low can they go? The Federal Reserve surprised Wall Street earlier this week by cutting its fed funds short-term interest rate target by three-quarters of a percentage point, to 3.5 percent. The move had the effect of reducing rates on mortgages and home equity loans, and reassured investors that the Fed will do what it can to spur economic activity as long as the threat of recession looms.

But as much as Fed Chairman Ben Bernanke might like to keep the economy rolling by slashing interest rates, it's not clear how much room he'll have to do so. Two factors complicate the outlook for further interest-rate cuts: the hefty losses in the financial sector that are making banks less eager to lend money, and the prospect that lower rates will chase overseas investors away from the dollar, lowering the value of the greenback and boosting inflation. Adding to the case against deep rate cuts is the widespread perception that it was the Fed's rate-cutting zealousness after the last recession that led to the housing bubble that now threatens to derail the economy.

For now, all those worries aside, the market expects to see interest rates go lower. Given the scale of losses tied to the collapse of the housing bubble - the decline in real estate prices in coming years could cut household wealth by $4 trillion to $6 trillion, according to some estimates - economists say it's understandable that the Fed is doing what it can to support growth. Rising inflation "is not a factor restraining the Fed at the moment," says James D. Hamilton, professor of economics at the University of California, San Diego. He says the Fed views the current situation as "maybe a little scarier than the typical downturn" because of problems in the credit markets that threaten to starve businesses of capital needed to fund expansion.

Because of hefty losses on mortgage-related debt, banks like Citi (C, Fortune 500) and Bank of America (BAC, Fortune 500) have been raising billions of dollars just to boost their capital cushion for future losses. Setting aside bigger reserves means less money for lending to businesses and consumers.

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forumposters · 01-26-2008, 02:09 AM

I think the fed cuts another 1/2 points next week and then another 1/4 point again. The risk of the Dow crashing 1000 points or more if they don't cut at least that much is too high. We don't need a recession and the Fed must do this to keep us out of one.

waltky · 01-26-2008, 02:33 AM

I look for another quarter point cut, and then maybe another a little on down the road.

Banks have to realize a 3% profit margin just to pay overhead costs and pay employees salaries and benefits, keep the doors open and the lights on.

bizwiz · 01-26-2008, 11:06 PM

For people like me who earn in dollars. A weak dollar is not good news, my earnings are the same but when converted to my local currency I have less purchasing power. Although it's now cheaper to travel.

waltky · 01-26-2008, 11:25 PM

The best way to straighten out the subprime crisis would be to convert the ARM loans to fixed rate ones...

Fixed mortgage rates fall to lowest since '04
January 24 2008: Rates on home loans drop after Fed makes emergency cut to fed funds rate, Freddie Mac says.

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Mortgage rates continued to fall this week, with 30-year and 15-year fixed-rate mortgages hitting their lowest levels in nearly four years, Freddie Mac reported Thursday. The government-sponsored loan buyer said the rate on a 30-year fixed-rate loan averaged 5.48 percent for the week ending Thursday, down from 5.69 percent last week.

At this time last year, the 30-year fixed-rate mortgage averaged 6.25 percent. The 30-year rate has not been lower since the week ending March 25, 2004, when it averaged 5.40 percent. "Economic news released last week confirmed the weak condition of the housing market," Freddie Mac vice president and chief economist Frank Nothaft said in a statement.

"When the Federal Reserve cut the target federal funds rate by three quarters of a percentage point, the action was extraordinary in both the magnitude and the timing of the rate cut," he said. Freddie Mac said 15-year fixed-rate loans averaged 4.95 percent, down from 5.21 percent last week. A year ago, the 15-year rate averaged 5.98 percent. The 15-year rate has not been lower since the week ending April 1, 2004, when it averaged 4.84 percent.

Rates on five-year adjustable-rate mortgages (ARMs) averaged 5.13 percent, down from 5.40 percent last week. The 5-year rate averaged 6 percent at this time last year. One-year Treasury-indexed ARMs averaged 4.99 percent, down from 5.26 percent last week. At this time a year ago, the 1-year ARM averaged 5.49 percent.

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waltky · 03-18-2008, 05:25 PM

Rate cut helps dollar...

Fed cuts rates by 3/4 of a point
March 18, 2008: Central bank lowers key rate to lower borrowing costs for consumers, businesses, as it risks lower dollar in effort to ward off recession.

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The Federal Reserve slashed a key interest rate by three-quarters of a percentage point Tuesday, in the central bank's continued effort to restore confidence in the economy and battered financial markets. Although some experts cautioned that such a big cut may lead to more inflation, stocks soared as Wall Street cheered the news. One economist said the cut was what investors needed to see since it showed the Fed is still worried about both a recession and inflation.

"I think it's the right step, a measured step and ultimately it has to be viewed as a compromise," said Bernard Baumohl, head of the Economic Outlook Group, a Princeton, N.J., research firm. The Fed cut its federal funds rate, an overnight bank lending rate, to 2.25%. It is the sixth cut in the past six months and comes at a time when the Fed is trying to keep the economy from slipping into recession - although many think it has already entered one.

Interest rate cuts are usually viewed as beneficial for the economy since they typically lead to more lending. The federal funds rate affects how much consumers pay on credit cards and home equity lines of credit, as well as the rate paid by many businesses on loans tied to banks' prime rate. But some experts think lower rates won't solve the credit crunch paralyzing Wall Street. The Fed cited a weakening labor market and a slowdown in spending by consumers, as well as a continued crisis in financial markets and tight availability of credit to justify the cut. U.S. employers have cut 85,000 jobs so far this year, according to the Labor Department, the most in four years.

'Compromise' on the growth-inflation debate

See also:

Dollar rebounds after Fed rate cut
March 18, 2008: Greenback takes break from recent retreat after central bank cuts key interest rate by three quarters of a percentage point.

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The U.S. dollar moved higher against several major currencies Tuesday after the Federal Reserve cut interest rates by three quarters of a percentage point - a less aggressive move than some investors were hoping for. The 15-nation euro traded at $1.5715, down from $1.5731 late Monday. But prior to the Fed's decision to cut interest rates, the euro was trading $1.5792. The dollar also moved higher against the British pound but eased further against the yen.

The greenback has moved sharply lower in recent weeks against a number of foreign currencies on expectations that the Fed will keep cutting interest rates to keep the U.S. economy from entering a recession. But Tuesday's decision to lower the federal funds rate by three quarters of a percentage point was a disappointment for some investors who were hoping the central bank would act more aggressively by cutting rates by a full percentage point.

A rate cut puts pressure on the dollar since it makes dollar-denominated investments less attractive to outside investors. In its accompanying statement, the Fed acknowledged that inflation is a growing concern, but it left the door open to more rate cuts which would further pressure the greenback. "I don't think this [cut] changes the outlook for significantly lower rates from here," said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc. "Any rebound we might get in the dollar is going to be pretty limited."

At its January meeting, the central bank lowered the federal funds rate by half a percentage point. That followed an emergency three-quarters of a percentage point cut just a week earlier. Although a weak dollar also typically drives domestic and overseas demand for U.S. goods, it also poses an inflationary risk to the economy by pushing up the price of commodities such as oil and gold.

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