Fed Makes Bold Cut in Key Rate
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From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.
Today, Federal Reserve policymakers did something they haven't done in more than four years: They cut interest rates. And they cut them by half a point, more than many economists expected.
The federal funds rate, the rate at which banks borrow from each other, now stands at 4.75 percent. The Fed said the move is an attempt to keep the troubles in the mortgage markets from dragging down the economy. The move was greeted enthusiastically on Wall Street. The Dow gaining more than 330 points or two and a half percent.
NPR's Jim Zarroli reports.
JIM ZARROLI: The Fed's Open Market Committee said it was cutting both the discount rate and the key federal funds rate by half a percentage point. As is customary, Fed officials also issued a statement about the move, one written in unusually clear language. The statements said the Fed wanted to forestall any negative effects on the economy that might arise from disruptions in the financial markets.
Nariman Behravesh is chief economist at the research firm Global Insight.
Mr. NARIMAN BEHRAVESH (Executive Vice President, Global Insight): Their biggest concern is that the problems in the credit markets and the effect on housing could begin to have bigger spill-over effects onto the rest of the economy. They don't want that to happen.
ZARROLI: The financial markets have been battered by the big downturn in subprime mortgages this year. There have been record defaults and many big lenders have been driven out of business. So many people have lost so much money buying mortgage-backed securities that they've grown reluctant to invest at all, and that can have a big impact on the overall economy.
By lowering the cost of borrowing, the Fed is making it easier for institutional investors who may be facing big losses to survive the downturn, but that isn't the purpose of the cut.
Former Fed Governor Alice Rivlin says the real impact of today's half point or 50 basis point rate cut is to send the message. That message, she says, is that the Fed is watching the problem closely and is ready to take action as needed to stabilize the economy.
Ms. ALICE RIVLIN (Former Governor, U.S. Federal Reserve): It was exactly what I hoped they would do and I think it's the right thing to have done. It signals that they're very serious about forestalling a recession and they're acting in a strong way, it's a much stronger signal than the 25 basis points move.
ZARROLI: The cut will lower the costs of some forms of consumer borrowing such as home equity credit lines. It could also make things easier for homeowners who took out adjustable rate mortgages that become more expensive after a few years. But Edward Leamer, who directs the UCLA Anderson Forecast, says rate cuts won't solve the economy's problems by themselves as long as conditions are so uncertain.
Professor EDWARD LEAMER (Director, Anderson Forecast, UCLA): I mean the problem is the financial markets and Wall Street are having a hard time pricing those mortgage-backed securities. And homeowners, buyers, and sellers are having a hard time pricing their homes. And until there are some sensible price - market price out there for both of those, the transaction volumes are going to be very low.
ZARROLI: For all that, investors seemed thrilled by the Fed's action today and by the size of the rate cut that was approved. Many seemed to believe this won't be the last cut. Stock prices jumps so high that by the end of the afternoon, the Dow Jones Industrial Average was up by triple digits, and the New York Stock Exchange had to impose a ban on some kinds of automated trading.
Jim Zarroli, NPR News, New York.
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