FEDERAL RESERVE CUTS FEDERAL FUNDS RATE

As many expected, the Federal Reserve cuts the Federal Funds rate, the rate at which banks can borrow from the Fed on an overnight basis, by one-quarter point on Wednesday. This may be the last rate cut for some time as concerns over inflation may cause the Federal Reserve to hold rates or even raise them going forward.

From The New York Times:

The Federal Reserve, mixing concern about the feeble economy with worries about rising inflation, reduced short-term interest rates Wednesday for the seventh time since September, while signaling a pause in any additional rate cuts for now.

The Fed’s action brought the federal funds rate — the rate it charges banks for overnight loans — to 2 percent, from 2.25 percent, the lowest level since November 2004. It defended that step as necessary to counter the ailing housing sector and the “considerable stress” shadowing financial markets.

The move followed new indications that the economy remained fragile at best. The Commerce Department reported early Wednesday that the economy expanded only 0.6 percent on an annualized basis in the first three months of 2008, short of an overall downturn but still far from healthy.

FED MAKES 1/2 POINT RATE CUT

For the second time in eight days the Federal Reserve has moved to cut interest rates, this time trimming 1/2 point from the federal funds rate, which now sits at 3.0%.

The move today means that in eight days the Fed has lowered the federal funds rate by 1.25%. Why? By making these cuts the Fed is using monetary policy to attempt to put more money into the money supply, which should stimulate the economy. The hope is that these moves will help avert, or at the minimum lessen the impact of, a recession.

From The New York Times:

In lowering its benchmark Federal funds rate by half a point, to 3 percent, the central bank acknowledged that it is now far more worried about an economic slowdown than rising inflation, and it left open the possibility of additional rate reductions.

From The Federal Reserve Board of Governors:

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 percent.

FED MAKES EMERGENCY 3/4-POINT RATE CUT

The Federal Reserve made their first emergency rate cut since September of 2001 and the largest cut since 1984 this morning.

From The New York Times:

“It’s a once-in-a-generation event,” said Mark Zandi, chief economist at Moody’s Economy.com. In recent years, the Fed has rarely acted between scheduled meetings of the committee, and almost always in increments of one-quarter or one-half point. It was the biggest short-term cut since October 1984.

In a statement Tuesday morning, Fed officials said they made the decision to lower rates after “a weakening of the economic outlook” and noted that “broader financial market conditions have continued to deteriorate.”

FED LOWERS KEY DISCOUNT RATE HALF POINT

From USA Today:

Stocks soared Friday after the Federal Reserve did what Wall Street was clamoring for and cut its key discount rate a half percentage point.

The move quelled investors' credit worries at least for the time being and initially sent the Dow Jones industrials up more than 300 points before retreating some.

The Fed — which had resisted lowering rates despite weeks of market volatility, and instead added nearly $120 billion in liquidity into the banking system — cut its discount rate to 5.75% from 6.25%. The Fed acknowledged that the stock market turbulence that has pulled the Dow by hundreds of points a day was posing a risk to economic growth.

But the central bank made no mention of lowering its target for the federal funds rate, which has stood at 5.25% for more than a year. The fed funds rate determines the rates that banks charge each other for loans, while the discount rate only covers loans the Fed makes to banks. Many strategists believe the market won't settle down until the Fed lowers the fed funds rate target, considered a more significant benchmark.

Traders who bet on how the Fed might alter rates now expect the central bank will lower the benchmark fed funds rate at its next meeting on Sept. 18. Some investors are hoping for a cut in that benchmark rate even sooner.

"If the cut in the discount rate succeeds in restoring confidence, then perhaps there is no need for the Fed to cut rates at the Sept. 18 meeting," said John Lonski, chief economist of Moody's Investor Service. He added, though, that the key line in the Fed's statement Friday was its willingness to take more steps to prevent market volatility from harming the economy.

"That means the Fed is prepared to make a rate cut if stability doesn't come," Lonski said.

FEDERAL RESERVES LEAVES RATES AT 5.25%

On Wednesday, the Federal Reserve left the Federal Funds Target Rate unchanged at 5.25%. That is the highest rate in six years. After increasing the rate 17 consecutive times from June 2004 to June 2006, the Fed has now left it unchanged for five consecutive meetings.

USA Today