Oct 31
Fed Hands Out 0.25% Halloween Rate Cut
Washington–October 31, ‘07– The Federal Reserve, confronted with surging oil prices and a slumping housing market, cut a key interest rate by a quarter-point on Wednesday, the second rate reduction this year. The move comes on the heels of a half-point reduction to the federal funds rate in September, which was also interpreted as an effort to juice the economy.
The central bank lowered the federal funds rate to 4.5 percent in an effort to stimulate economic activity and keep the country from dipping into a recession. The move will make it cheaper for consumers and businesses to borrow money.
The move was wholly expected on Wall Street - so much so that traders said the cut was already priced into their buying and selling.
The federal funds rate is the amount of interest that banks charge each other to borrow money. The fed also cut .25% off the discount rate, or the rate charged to commercial banks and other depository institutions on loans from their regional Federal Reserve Bank.
Commercial banks historically follow the Fed’s lead, meaning they will cut their prime lending rate, the benchmark for millions of consumers and business loans, by a quarter point to 7.50%.
The Fed’s action came on the same day the government announced that the overall economy grew at a stronger-than-expected 3.9 percent rate in the July-September quarter. However, economists are worried that growth will be less than half that amount in the current quarter as the country struggles with a deepening housing slump.
Federal Reserve Chairman Ben Bernanke hinted at Wednesday’s rate cut in a recent speech during which he suggested that the deepening housing slump could prove “a significant drag” on economic growth into 2008.
Bernanke said he would “act as needed” to keep the economy chugging along smoothly and to stave off inflation. Market observers believe Wednesday’s cut may not be the last.
“My guess is there will be more rate cuts - but I don’t think they will be meeting after meeting. They are doing this because the market needs reassurance. If in the next go round - if the market is looking better - we’ll stop cutting,” said Lee Schultheis, chief investment strategist at AIP funds. The next and final meeting of the FOMC this year is scheduled for Dec. 11.