DJ & NasdaQ feel down
Fed Trims Rates 1/4 Point, Disappointing Investors
Topics:Interest Rates | Inflation | Ben Bernanke | Employment |
Consumers | Federal Reserve | Federal Budget (U.S.) | Economy (Global) |
Economy (U.S.)
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The Federal Reserve cut benchmark U.S. interest rates by a modest
quarter-percentage point on Tuesday to help the U.S. economy withstand
tightened credit and a prolonged housing slump, disappointing Wall Street,
which had hoped for more-aggressive action.
The central bank's decision takes the bellwether federal funds rate, which
governs overnight lending between banks, down to 4.25 percent. While the action
was widely expected, some economists had thought the Fed might offer a bolder
half-point reduction in the rate.
Pablo Martinez Monsivais / ASSOCIATED PRESS
Federal Reserve Bank Chairman Ben Bernanke
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The blue chip Dow Jones Industrial Average plunged nearly 300 points, while
prices for U.S. government bonds and the value of the dollar rose.
"This was not what the market was looking for and did not move to clarify Fed
intentions or assuage concerns of market participants of another leg down in
the economy and resurgence of financial turmoil," said Joseph Brusuelas, chief
U.S. economist of IDEAglobal in New York.
The Fed has now cut overnight rates, their key economic policy lever, by a full
percentage point since mid-September in an effort to put a floor under an
economy increasingly seen at risk of falling into recession. In a related move,
the Fed trimmed the discount rate it charges for direct loans to banks by a
matching quarter point to 4.75 percent.
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After the Rate Cut: Winners and Losers
"Today's action, combined with the policy actions taken earlier, should help
promote moderate growth over time," the Fed's policy-setting Federal Open
Market Committee said in a statement outlining its decision.
The Fed noted that financial strains had increased in recent weeks and said
some inflation risks remain. It refrained from offering its usual assessment of
the balance of risks facing the economy.
"Recent developments, including the deterioration in financial market
conditions, have increased the uncertainty surrounding the outlook for economic
growth and inflation," it said.
"I think we have a divided Fed, which is the problem" Bill Gross, head of the
world's biggest bond fund, Pimco, said on CNBC immediately after the decision.
"We have half of the Fed that gets it ...The other half doesn't get it. That
portion is more academic--less connected to the financial market."
The Fed's decision follows renewed deterioration in credit markets after major
financial institutions around the world reported billions of dollars worth of
write-downs due to extensive exposure to delinquent mortgages.
Markets and policy-makers have been caught off guard by how hard and broadly
rising defaults on U.S. subprime mortgages have hit. As roughly 1.8 million
adjustable rate mortgages line up for reset at sharply higher interest rates in
2008, the prospect of more pain for homeowners and banks has loomed
increasingly menacingly since the Fed last met in October and lowered the
federal funds rate by a quarter point to 4.5 percent.
But the market could be misreading the Fed that today's quarter point rate cut
represents the entire fed response to the credit crunch.
A Fed source, told CNBC's Steve Liesman that the Fed still has under active
consideration a set of tools to address the liquidity issue.
The source, who asked not to be named, would not say what those tools are, but
Liesman's senses these ideas will see the light of the day sooner rather than
later.
In the past, Fed sources have mentioned about the effort to come up with
creative ways to address the liquidity crunch that did not necessarily use the
fed funds rate. Ideas have included lowering the spread between the discount
window and the funds rate, or long-term repo actions that put more cash into
the market for a long period of time.
Clearly, other ideas are being discussed in addition to this. It's reasonable
to assume that the Fed was less than happy and maybe a bit concerned with the
market's reaction to the decision today. With the chief concern that today's
action is the sole Fed response to the liquidity crunch.
RELATED LINKS
Cramer: Fed Doesn't Get It
Pisani: Why Markets Tanked
Read the Statement
What the Fed Is Facing
Why a Rate Cut Is Likely
Home Sales Rise, But So Do Recession Forecasts
Bernanke Open to Rate Cut
Is Recession Coming?
Fed's No. 2 Hints at Rate Cut
Fed Sees Slower Growth But Wary of Cutting Rates
With home prices sliding and borrowing conditions tightening, many forecasters
are warning that the economy is skirting close to recession.
The No. 2 official at the International Monetary Fund said in an interview
published on Tuesday that U.S. recession fears were overblown.
"Never say never, but the latest indicators do not justify such a conclusion,"
IMF First Deputy Managing Director John Lipsky told an internal IMF
publication."
© 2007 The Associated Press. All rights reserved. This material may not be
published, broadcast, rewritten or redistributed.
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