Fed Cuts Funds Rate to 1.5 Percent

MBA (10/8/2008 ) Sorohan, Mike
The Federal Open Market Committee this morning, in concurrent action with other central banks worldwide, cut the federal funds rate by 50 basis points to 1.5 percent—a move that was widely anticipated by markets, although not necessarily before the FOMC’s next scheduled meeting Oct. 28-29.
In a joint statement, the Fed; Bank of Canada, the Bank of England; the European Central Bank; Sveriges Riksbank (Sweden); and the Swiss National Bank (with a statement of support from the Bank of Japan) announced reductions in policy interest rates.

The Central Banks’ statement (http://www.federalreserve.gov/newsevents/press/monetary/20081008a.htm), said “inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability. Some easing of global monetary conditions is therefore warranted.”

The FOMC’s decision to lower its target for the federal funds rate to 1.5 percent came “in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.”

Despite previous actions by the Fed and other central banks, as well as legislative remedies approved by Congress in recent weeks, the U.S. and global markets continue to deteriorate, sparking fears of a worldwide recession. The Dow Jones Industrial Average fell by 5.1 percent yesterday; the 508-point drop marked the fifth consecutive decline. In October alone, the DJIA has fallen by more than 15 percent. Other key indicies, such as the Standard & Poor’s 500, have seen similar drops.

The crisis is hitting consumers as well; the Congressional Budget Office yesterday said that over the past 15 months, Americans’ retirement savings have taken a $2 trillion hit—a loss of value of nearly 20 percent.

“Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months,” the FOMC said. “Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.”

The FOMC policy action came by unanimous consent.