Federal Reserve Cuts Interest Rate to 3 Percent

SAN FRANCISCO - January 30, 2008 - The Federal Reserve cut its benchmark short-term interest rate today just eight days after it took unprecedented action to lower borrowing costs, the latest move in a concerted push by the nation’s central bank to head off a possible recession.

The Fed’s widely expected 0.5 percent reduction to 3 percent in the federal funds rate - which banks charge each other for overnight loans - came on the heels of a report that the nation’s economy came to the edge of recession during the last three months of 2007.

Gross domestic product - the nation’s total output of goods and services - expanded at an annual rate of just 0.6 percent, a steep drop from the 4.9 percent rate in the third quarter, the Commerce Department reported today. The economy’s near stall was due principally to the collapse of the housing market. Residential construction fell at a stomach-churning 23.9 percent annual rate.

Wall Street reacted favorably to the Fed’s move, with the prices of stocks and bonds jumping after the rate cut announcement.

The stock market had been in a tailspin during the first three weeks of January, as investors bailed out in fear that a sinking economy would hurt corporate profits. A panic-driven plunge in share prices around the world Jan. 21 threatened to deepen the economy’s woes, prompting the Fed to carry out its emergency 0.75 percent rate as a signal of its determination to fight recession.

In the space of a little more than a week, monetary authorities have slashed the benchmark short-term rate a full 1.25 percentage points, the largest cut the central bank has ever made in such a short amount of time.

It’s “a truly aggressive set of actions,” Pennsylvania economic consultant Joel Naroff said. Fed officials recognize that “threats to the financial markets and therefore economic growth remain and that they had to get the Fed into accommodation mode. They have done so in a very dramatic fashion and have made the financial markets very happy.”

In explaining its latest action, the Fed cited market turmoil and the clampdown on credit that has accompanied it.

“Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” the central bank noted in a statement.

Lowering the federal funds rate reduces what it costs banks to borrow money. When their costs go down, banks typically turn around and trim rates for consumers and business borrowers. That encourages businesses to expand and households to spend. Homeowners with adjustable mortgages and consumers with credit cards linked to the prime rate often see their rates move down.

The Fed made today’s cut during a regularly scheduled meeting of its policy committee, a move it all but promised when it announced its extraordinary reduction Jan. 22. The committee’s vote was 9-1 in favor, with Dallas Federal Reserve Bank President Richard Fisher dissenting.

The central bank’s move to push down the cost of money come as Congress considers measures to stimulate the economy. Legislation passed by the House of Representatives this week would give rebates to most taxpayers and boost the housing market by raising the size of mortgages that could be backed by federal guarantees.

Fed cuts interest rate - 2nd time in 8 days
by Sam Zuckerman | San Francisco Chronicle