Transcripts

The Fed Reserve Cuts Rates Again

SUSIE GHARIB: A big interest rate cut by the Federal Reserve today, but stocks on Wall Street were mixed. The central bank lowered its key Federal funds rate by half a percentage point. It now stands at just 1 percent and as a result, the prime rate which many car and home equity loans are based on, also dropped. Today's action follows a similar rate cut just three weeks ago by the Fed and other central banks around the world. As Suzanne Pratt reports, interest rates could fall even further.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Short-term interest rates have only been this low twice in the last 50 years, once as the housing bubble was beginning to inflate in 2003, the other when Dwight Eisenhower was in the White House. In just over a year, the Federal Reserve has cut its benchmark rate from 5 1/4 to 1 percent. The U.S. central bank has slashed rates and used other tools in its arsenal, all in an effort to keep the country from plunging into a deep recession and to prop up fragile financial markets. Experts say investors were expecting a cut today and there was little chance policymakers would disappoint. Economist Ethan Harris says it was also important that the Fed's vote was unanimous.

ETHAN HARRIS, CO-CHIEF U.S. ECONOMIST, BARCLAYS CAPITAL: I think this was a lot about signaling to the markets, about confidence building, be decisive, be united in the way you implement the policy.

PRATT: In the statement that accompanied today's decision, policymakers noted weakness in the economy on many fronts including consumer and business spending. They also changed their assessment of inflation risks, saying quote, the committee expects inflation to moderate in coming quarters to levels consistent with price stability.

HARRIS: That's a big admission for the Fed. It's saying that they're really fighting only one war and that's the war against recession. They are not worried about inflation.

PRATT: Most economists expect the Fed will keep trimming rates, if we see continued distress in the credit markets. Economist Josh Feinman says the Fed will go as low as it has to go.

JOSHUA FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MANAGEMENT: I think that the Fed is going to possibly lower rates further and almost certainly keep rates low through well into 2009, until they are very, very confident that the credit crisis has eased and the downside risks to the economy have receded.

PRATT: The next Fed meeting is scheduled for December 16th. Right now, some economists believe a 0.25 point cut in rates is likely at that meeting, while a 0.5 point slice is possible. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York