Amid signs of an accelerating international stock sell off triggered by growing fears that U.S is either going into or already solidly in a recession, the Federal Reserve lowered its interest rate 0.75 but it seems to have done little good on Wall Street.
The Federal Open Market Committee lowered its target for the federal funds rate on overnight loans between banks to 3.5 percent, from 4.25 percent. The move was unusual both in its scale and its timing: In recent years, the Fed has only rarely acted between scheduled meetings of the committee, and almost always in increments of one-quarter or one-half point. It was the biggest single cut since October 1984.
If only it were that easy.
For the shaken world markets, the move seemed to provide some relief. When trading resumed after a Monday holiday, Wall Street initially joined in the plunge that had shaken Europe and Asia for two days. But after opening down by more than 460 points, the Dow Jones industrial was off about 150 points, or 1.2 percent, at 10:30 a.m. Other indexes were also down, but by less than 2 percent, and some European stock indexes moved into positive territory.
In a statement, the Fed said: “The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.”
How much of an emergency is it? The Washington Post notes that the the “surprise” rate cut was made via videoconference last night.
Additionally, the paper points out, this is the biggest single rate cut since 1984 “beyond even the initial half-point reduction that the Fed made following the Sept. 11, 2001, terrorist attacks. The new federal funds rate of 3.5 percent will lead to lower rates for credit cards, auto loans and home equity lines of credit. That, in turn, can encourage economic growth by prompting consumers and businesses to spend more.”
And it may not be the end of emergency actions, Reuters reports:
The Federal Reserve may cut benchmark interest rates by another half percentage point next week after cutting rates by three quarters of a point on Tuesday, said Mark Kiesel, a portfolio manager at Pacific Investment Management Co.
The Fed on Tuesday slashed the federal funds rate to 3.50 percent in a surprise intermeeting decision. It also cut the discount rate by the same amount, to 4 percent.“The Fed has to be aggressive,” Kiesel told Reuters. “They’re trying to catch up right now, but they still have more work to do. It wouldn’t surprise me if they go another 50 basis points next week.”
“We have three things going on right now that the Fed has less control over,” said Kiesel, from his Newport Beach, California office:
“Housing is going down, stocks are going down and the labor market is deteriorating. That’s three strikes and you’re out.”
“The Fed was behind the curve and they’re trying to play catch up,” he added.
What does it mean? According to Dow Jones’ “Marketwatch,” it is a sign of weakness.
Tuesday’s emergency 75 basis points rate cut by the Federal Reserve is effectively an all-or-nothing play to stop global disaffection with the U.S. economy. See related story.
The cut wasn’t surprising so much for its size, as for its timing.
Markets had already been expecting the Fed to act aggressively on interest rates at its regularly scheduled meeting next week.A cut between meetings carries with it a sense of drama and urgency that can sometimes convince fearful investors that monetary authorities are serious about turning around the economy. But it also carries the suggestion that central bankers are themselves really worried and fearful.
And the text of the statement accompanying the cut was hardly reassuring. It noted that “incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.” See text of FOMC statement.
Coming just seven days ahead of the regularly scheduled meeting, Tuesday’s move looks like a response to the turmoil that has rocked global markets during the three-day holiday weekend in the U.S.But cutting rates in an attempt to soften the blows of market volatility is hardly a sustainable policy position for any central banker.
Marketwatch says this means one of two grim things:
(1) The Feds are more worried about the economy then they admit
or
(2) The Feds realize that the power to impact the situation could be diminishing.
Neither of those are assuring scenarios.
And the context?
Business people in almost all industries are saying 2008 is proving to be a tough year — and it’s only a few weeks old. The economy has now become the number one issue on the political scene. Credit card deliquencies are way up. Out here in California, the state is in a major crisis. Here in San Diego, more than ever, you can see unrented business space and newspapers are filled with stories about how Gov. Arnold Schwarzenegger is going to have to make massive state cuts — which some consider a mere band aid on the overall situation.
The sinking feeling on the street: things may get worse before they’ll get better. All during an election year…
For blog reaction GO HERE.
Joe Gandelman is a former fulltime journalist who freelanced in India, Spain, Bangladesh and Cypress writing for publications such as the Christian Science Monitor and Newsweek. He also did radio reports from Madrid for NPR’s All Things Considered. He has worked on two U.S. newspapers and quit the news biz in 1990 to go into entertainment. He also has written for The Week and several online publications, did a column for Cagle Cartoons Syndicate and has appeared on CNN.