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.