As fears of a recession intensified, the Federal Reserve cut the federal funds rate 0.75 percent Tuesday. A finance journalist from the Wall Street Journal discusses the rate cut and the markets' response.
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The Federal Reserve acts again. Ray Suarez has our update.
Today saw yet another aggressive move by the central bank to combat the credit crisis threatening the U.S. economy. Chairman Ben Bernanke and his colleagues on the Federal Open Market Committee have now cut the federal funds rate six times since September.
The U.S. markets responded to that and other economic news. Not only did the Dow Jones gain more than 400 points, but the broader Standard and Poor’s Index had its biggest daily percentage gain in five years.
Here to tell us more is Greg Ip of the Wall Street Journal.
And, Greg, the market was widely expecting a full-point cut when trading began today.
GREG IP, Wall Street Journal:
It got three-quarters. Is that still considered a significant event?
Oh, certainly, Ray. I mean, let’s put this in perspective. This only the second time in 14 years that they have cut by 0.75 of a percentage point. The first time was in January. They have now cut by 3 percentage points just since September.
That’s a pace of monetary easing which is even more rapid than what they did in 2001, which at the time was one of the most rapid on record.
And it tells us two things, Ray. It tells us, first of all, that the Fed sees considerable risks to the economy. There is essentially a risk of an adverse feedback loop here, where the economy gets weaker, which causes more loan losses, which causes banks to tighten up their lending, which makes the economy weaker again.
The second thing it tells us is that the Fed is prepared to act very aggressively against those risks, even as they have their eye at the other side on the problem of inflation.