Fed Cuts Rates to Prevent Slump
The Federal Reserve cut a key interest rate for the first time in four years, seeking with an aggressive half-point move to prevent a steep housing slump and turbulent financial markets from triggering a recession.
The Associated Press reported that the Fed announced today (Sept. 18) that it was reducing its target for the federal funds rate, the interest that banks charge each other, from 5.25% to 4.75%. The half-point reduction was double the quarter-point move that many economists had been expecting.
A jubilant Wall Street sent the Dow Jones industrial average up more than 200 points shortly after the Fed announced its move.
The action was designed to boost economic growth by lowering borrowing costs for millions of consumers and businesses. Commercial banks were expected to quickly match the Fed’s action by cutting their prime lending rate. The prime rate has been at 8.25% for the past 15 months.
The Fed’s action came in the midst of the worst slump in housing in 16 years. That downturn has triggered record defaults in subprime mortgages and roiled financial markets around the globe as investors have become worried about where the spreading credit problems will next appear.
The financial market turmoil represents the first major test for Fed Chairman Ben Bernanke, who took over from the venerable Alan Greenspan in February 2006.
In addition to cutting the federal funds rate by a half point, the central bank also reduced its discount rate, the interest it charges in making direct loans to banks, by a half-point as well.
The Fed had also cut the discount rate on Aug. 17 as it scrambled to respond to the growing credit crisis.
In explaining its action, the Fed said that “the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.”