For Ninth Time in a Year, Fed Chops Key Rate Again to 1 Percent
The central bank reduced its target for the federal funds
rate, the interest banks charge on overnight loans, to 1 percent, a low last
seen in 2003-2004. The funds rate has not been lower since 1958, when Dwight
Eisenhower was president.
The cut marked the second half-point reduction in the funds
rate this month and this ninth since September 2007. The Fed slashed the rate
by 50 basis points in a coordinated move with foreign central banks on Oct. 8.
In a brief statement explaining Wednesday’s action, the Fed
said the “intensification of financial market turmoil is likely to exert
additional restraint on spending, partly by further reducing the ability of
households and business to obtain credit,” the Associated Press reported.
The central bank said it had room to lower rates because the
spreading economic weakness was lowering the risks that inflation would get out
of control. Indeed, the weakness has caused dramatic declines in the price of
oil and other commodities.
While many economists believe the country has already fallen
into a recession, they think the aggressive efforts by the Fed to cut rates and
take other actions to unfreeze credit markets will keep the country from
plunging into a prolonged and deep downturn.
The Fed’s action was expected to be quickly followed by a
reduction by commercial banks in their prime lending rate, the benchmark for
millions of consumer and business loans, by a similar half-point.
The Dow Jones industrial average, the Standard & Poor’s
500 index and the Nasdaq all posted moderate gains ahead of the decision, but
fell into slightly negative territory immediately following the announcement.
The U.S. markets were mostly stalled Wednesday morning after
the Dow’s nearly 900 point rally Tuesday — one of the largest one-day point
gains ever for the market
“Yesterday’s rally may make some people to pause and
ask if this isn’t the time to actually get out. That mindset is still out
there,” Andre Bakhos, president of Princeton Financial Group in New
Jersey, told Reuters.
The Fed cut rates recently in a coordinated effort with
European banks, without much positive impact on the markets.
“They are trying to offset this incredibly tight credit
crunch and to the extent that they have cut rates it’s probably helped some, it
just hasn’t been enough to offset things,” David Wessel, economics editor
at The Wall Street Journal told National Public Radio.
“Another rate cut may not be a big help but it would
probably be worse for the economy if they didn’t cut them at all.”
Oil moved above $67.50 a barrel on Wednesday, boosted by the
surge in global stock markets as well as an interest rate cut by China.
European and Asian stock markets were up strongly on Wall Street’s Tuesday
rally and hopes of more coordinated rate cuts, including the Bank of Japan.
The U.S. Commerce Department also reported an unexpected
gain in orders for big-ticket manufactured items like cars and machinery. Orders
rose 0.8 percent in September, when they were expected to fall 1.5 percent.
But more troubling economic news is expected later this
week. On Thursday, the Commerce Department will likely report that the economy
shrank at a 0.5 percent annual rate in the third quarter, the most since the
2001 recession, Bloomberg News reported.