Federal Reserve Cut Half Point

Half Point Cut
by Jeffrey Cane Jan 30 2008
As economy grinds to a halt, what's next for the Fed?

Federal Reserve policymakers lowered their benchmark interest rate by a half point, to 3 percent, pointing to "a deepening of the housing contraction as well as some softening in labor markets."

"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," the Fed said.

The statement left the door open to further rate cuts if needed, with the Fed saying it "will act in a timely manner" if it sees further risks to economic growth."

Stocks, which had modest losses before the announcement, turned sharply higher. The Dow Jones industrial average was up 1 percent minutes after the Fed cut. Treasury prices and the dollar weakened.

The move comes eight days after the Fed surprised investors with a three-quarter-point cut, citing "a weakening of the economic outlook and increasing downside risks to growth." It was the first rate cut to take place between meetings of Fed policymakers since September 2001, when the central bank acted in the aftermath of the terrorist attacks.

The January rate cuts represent the most aggressive action by the central bank since 1990. (See a chart of the Fed's benchmark rate here.)

Still, as Greg Ip of the Wall Street Journal points out, the Fed's statement serves as a reminder of "how much it has already done" as well as a declaration that it stands ready to act again.

"Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity," the Fed said today.

Today's economic data underscored the need for aggressive action. The Commerce Department reported today that the economy grew at an annual pace of 0.6 percent in the last three months of 2007, the slowest growth in five years, when the economy was just emerging from a recession. The advance gross domestic product estimate was nearly half analysts' forecasts. In the third quarter, the economy grew at a 4.9 percent annual pace.

"The G.D.P. hit stall speed," wrote Joseph Brusuelas, chief U.S. economist at IDEAglobal, according to MarketWatch.

Floyd Norris of the New York Times notes on his blog that the G.D.P. report showed that spending on nondurable consumer products other than food and energy was down in the quarter, after adjusting for inflation. "Put that down as another recession warning," he says.

There was one dissent to today's rate cut: Richard W. Fisher, president of the Federal Reserve Bank of Dallas, who preferred no change in the target for the federal funds rate at this meeting.

What next for the Fed? The market is already pricing in another quarter point cut when Fed policymakers meet next, on March 18. Some see the rate going as low as 2.25 or even 2 percent by the end of the year.

For the time being, however, as the Economist's View blog says, "Hopefully, though, we can now all catch our breaths for a little while and get a better assessment of exactly where we are."