Transcripts

The Federal Reserve Slashes Interest Rates

A Halloween treat from the Federal Reserve today as it cut interest rates. On Wall Street, stocks rallied after the Fed lowered the Federal funds target rate by a quarter of a percentage point. That key rate, which affects mortgages and consumer loans, is now 4.5 percent. The discount rate was also cut by a quarter to 5 percent. As Scott Gurvey reports, the big question now is, what's the Fed's next move?

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Fed today delivered exactly what Wall Street had ordered. It was the second rate cut in as many meetings and economist Steve Gallagher of Societe Generale says it had been widely anticipated.

STEPHEN GALLAGHER, CHIEF ECONOMIST, SOCIETE GENERALE: Given how fragile the financial markets are, the Fed was in a position where they couldn't disappoint those expectations. They really were sort of forced to follow through and give us another quarter of a point rate cut.

GURVEY: Wall Street has demanded lower rates to ease pressure on financial institutions struggling to cope with the failure of sub-prime mortgage obligations. In fact, initial market reaction was negative, mainly because many were hoping the rate cut would be larger. Traders were also worried about the Fed's statement, which warned quote, recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. The committee judges that after this action, the upside risks to inflation roughly balance the downside risks to growth.

Today's vote to cut rates was 9-1, Kansas City Fed President Thomas Hoenig dissenting. He would have left rates unchanged. Some economists agree, concerned that helping the financial sector may hurt the overall economy if lower rates cause the economy to overheat. Strong growth was reported today in spite of the housing downturn. GDP for the third quarter rose a better than expected 3.9 percent, showing no evidence of a consumer pull-back. And a private payroll report from ADP showed a much stronger labor market than expected. Stuart Hoffman of PNC Financial says he's not betting on another cut.

STUART HOFFMAN, CHIEF ECONOMIST, PNC FINANCIAL SERVICES GROUP: The statement is still concerned about inflation and, with one dissent from one of the presidents, I think says to the market, we're not leaning towards cutting the rate again as of now unless the data gets a lot weaker between now and year end.

GURVEY: Today's Fed action was seen by some as too little to forestall a housing-induced recession and by others as an ill-conceived bailout of Wall Street at Main Street's expense. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.