View Full Version : Economics Fed running out of rate to cut

Mr. Laz
10-30-2008, 10:12 AM
Fed cuts rates half a point, is open for more

Central bank says it will cut rates as needed to boost economy

By Greg Robb (http://www.marketwatch.com/news/mailto.asp?x=103+114+111+98+98&y=Greg+Robb&z=marketwatch.com&guid=%7B0966c29f-9945-4a76-a623-7aaa1fe038bb%7D&siteid=mktw), MarketWatch
Last update: 4:52 p.m. EDT Oct. 29, 2008

WASHINGTON (MarketWatch) -- The Federal Reserve on Wednesday slashed overnight interest rates and left the door open for more cuts -- all part of an effort to return confidence to investors so that a weak economy doesn't crater.

In its statement, the Federal Open Market Committee said it had unanimously decided to cut its benchmark target interest rate by a half of one percentage point to 1% and clearly signaled it was considering further cuts. This signal came in a statement saying that the main risk facing the economy was weak growth.

Any more rate cuts would bring the funds rate to its lowest level since July 1958.

NNC Financial Chief Economist Stuart Hoffman says the Fed made the right move when it cut rates, but it will still be some time before the housing market stabilizes. (Oct 29)<script type="text/javascript"> embedPlayerByVideoId('{BF8CF107-F308-4539-B67F-71246227643A}', 'video_BF8CF107-F308-4539-B67F-71246227643A', '162', '287'); </script><noscript> Please Enable Javascript </noscript>

Today's move, which was expected, follows a series of initiatives by the Fed and the Bush Administration to push cash into frozen credit markets, hoping to spur lending. As a result, the Fed has doubled the size of its balance sheet in the past month. At the same time, the Treasury has begun acquiring stakes in major financial institutions.

In addition, the Fed agreed to buy commercial paper from non-financial companies for the first time since the Great Depression. The Fed has also introduced a new fund to assist money markets.

In their official statement, Fed officials said the pace of growth has slowed "markedly" and the extraordinary financial market stress could put the economy at greater risk.

Inflation had moderated and should move even lower, the Fed said.

The FOMC said it "will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."
Importantly, the Fed statement drew no line in the sand at the 1% funds rate target, raising the possibility that rates may move lower.

While the move raises lots of technical questions about having rates so low, many analysts said these matters are of less concern than ending the credit crunch.
The Fed's statement issued at the end of its two-day meeting was remarkable for its pessimism.

"The intensification of financial market turmoil is likely to exert additional restrain on spending, partly by further reducing the ability of households and businesses to obtain credit," the statement said.
On the other hand, the outlook for prices was quite benign, the statement said.

"In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability," the statement said.

Many economists say that the next big threat for the central bank could be deflation, where prices fall sharply. This can be just as damaging for an economy as inflation. Former Fed governor Frederic Mishkin has called for the central bank to consider announcing a public floor below which it will not let the inflation rate fall.

10-30-2008, 10:19 AM
Hell yeah bring on the liquidity trap.

Dave Lane
10-30-2008, 10:20 AM
Free money free money no interest!!!