Fed Cuts Interest Rate to 3% as U.S. Growth Falters
Jan. 30 — The Federal Reserve lowered its benchmark interest rate by half a point to 3 percent, the second cut in nine days, and indicated its willingness to do so again to prevent a U.S. recession.
«Downside risks to growth remain,» the Federal Open Market Committee said in a statement after meeting today in Washington. In a reference to the volatility of the past five months, the Fed added that «financial markets remain under considerable stress and credit has tightened further for some businesses and households.»
The dollar tumbled and two-year Treasury notes rose after the decision as traders anticipated another reduction at the Fed’s March meeting, if not before. The cumulative reduction in rates since Jan. 22 is the fastest easing of monetary policy since 1990. The Standard & Poor’s 500 Index closed 0.5 percent lower and is down 7.7 percent this year.
«They’re going full-bore trying to keep the economy from recession,» said David Resler, chief economist at Nomura Securities International Inc. in New York. «Conditions in the market place are the driving force right now.»
Hours before the decision was announced, the Commerce Department reported that gross domestic product grew at an annual pace of 0.6 percent in the fourth quarter.
«The Fed has gotten religion and is going do what they need to do,» said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina.
Readiness to Respond
Fed officials said they will continue to assess financial markets and the economy «and will act in a timely manner as needed.»
«Recent information indicates a deepening of the housing contraction as well as some softening in labor markets,» the central bank’s statement also noted.
Chairman Ben S. Bernanke and the Fed’s Board of Governors also voted to cut the discount rate, the cost of direct loans from the central bank, to 3.5 percent from 4 percent.
Dallas Fed President Richard Fisher dissented from today’s decision, preferring no change.
Policy makers presented revised three-year economic forecasts at this week’s gathering. The Fed will release the projections along with minutes of the meeting on Feb. 20.
Today’s Commerce Department figures showed the Fed’s preferred inflation gauge rose at a 2.7 percent annualized rate last quarter. Fed officials in October forecast the personal consumption expenditures price index minus food and energy would rise 1.6 percent to 1.9 percent in 2010, offering a measure of their longer-term inflation objective.
Inflation
«The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully,» the Fed said in today’s statement.
Wall Street firms including Morgan Stanley, Merrill Lynch & Co., Goldman Sachs Group Inc. and Citigroup Inc. are forecasting the first recession since 2001 this year. Still, executives at firms such as Dow Chemical Co. said they don’t detect a downturn yet, while risks remain.
This year «will be slower than 2007,» Andrew Liveris, the chairman and chief executive officer of Dow Chemical, said yesterday. «It is an inconvenience, not a catastrophe.»
United Parcel Service Inc., Caterpillar Inc. and General Electric Co. are relying on gains overseas to counter slower growth at home.
Evolution Since August
Fed policy makers have struggled since August to contain the economic damage sparked by the worst housing recession in a quarter-century. The world’s largest banks and securities firms have recorded more than $133 billion in asset writedowns and credit losses since the beginning of 2007, which analysts blamed on weak and fragmented supervision and poor credit analysis.
«The Fed’s move lowers the cost of financing for Wall Street which is struggling to raise capital after being hit with writedowns not seen since the Great Depression,» said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
Foreclosure rates rose 75 percent in 2007 as a record amount of adjustable-rate loans to borrowers with weak or limited credit histories reset to higher rates, RealtyTrac Inc. data show. Home prices in 20 U.S. metropolitan areas fell 7.7 percent in November from a year earlier, the 11th consecutive decline, the S&P/Case-Shiller home-price index showed yesterday.
«We are in a historic housing bust right now, comparable to that of the Great Depression,» said Robert Shiller, chief economist of MacroMarkets LLC in Madison, New Jersey, who co- founded the house-price index. «The unraveling of that has unpredictable consequences.»
Delay in 2007
Fed officials waited until September to cut the benchmark lending rate, even though premiums on corporate bonds and lower- rated securities began to climb in late June.
By December, Fed policy makers had cut the benchmark lending rate 1 percentage point, yet still described the policy rate as «somewhat restrictive» as they deliberated whether to cut again that month, minutes show.
The government’s December payroll report, which showed a loss of 13,000 private sector jobs, the first decline since July 2003, began to reshape Fed officials’ views about risks.
Bernanke used a Jan. 10 speech to update the public. «The baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced,» he said, breaking with the Fed’s statement a month earlier which only expressed «uncertainty» about the outlook. He pledged «substantive additional action as needed.»
Confieso que hasta antes de esta marcha, en la que tuve el agrado de participar ayer, yo no creía que en Ecuador había una oposición así de importante y diversa. Los que salen en la foto en gran parte son guayaquileños de todas las edades–desde abuelitos y abuelitas hasta jóvenes universitarios y hasta niños todavía en brazos–y de todas los estratos sociales–desde los “pelucones”, como le dice el Presidente Correa a aquellos de ingresos altos, hasta los más humildes comerciantes minoristas y guayaquileños de los barrios marginales. Al parecer, no todos están contentos con el gobierno socialista del siglo XXI, y aquellos que no lo están parece que no son pocos como pueden ver en la fot
Marcha de tractores
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