December 11, 2007
Fed Disappoints With 1/4-Point Rate Cut
UPDATED.
The Federal Reserve nicked the benchmark federal funds rate for the third quarter in a row, but not by the half-point many investors were hoping for. The quarter-point cut brings the rate down to 4.25 percent.
The Dow Jones Industrial Average plummeted after the announcement, ending the day down more than 225 [UPDATED 5:17] 294 points. The decision indicates that the credit crunch is having a rippling effect throughout the broader economy, in the Fed's view. The interest rate was also cut a quarter-point to ease bank borrowing.
"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks," the Federal Open Market Committee said in a statement. Citing higher prices on energy and other goods, the committee added, "Some inflation risks remain, and" the committee "will continue to monitor inflation developments carefully."
The lone dissenter in the 9-1 vote was Boston Fed President Eric Rosengren, who thought the board hadn't gone far enough and pushed for a 50-basis-point reduction. (More negative reaction to the Fed's cautiousness can be found here, here and here. Kudoes can be found here.)
In critics' eyes, the Fed should be more aggressively trying to get ahead of a looming recession in 2008. Morgan Stanley yesterday became the first big Wall Street firm to predict an economic slowdown next year.
Though analysts disagree on the extent of the national and global liquidity drought, it is already evident that the housing implosion is having an effect on markets and consumer behavior -- to the degree that whether the drivers are ultimately psychological is almost beside the point. Today's quarter-point rate cut indicates that the Fed isn't convinced that a downward slide lies ahead, even if it remains concerned about inflation.
Last week, the White House announced a comprehensive new initiative designed to reach out to struggling homeowners and help slow the rate of foreclosures. The House passed legislation addressing the problem last month, but it was not acted on in the Senate due in part to the frequent absences of Christopher Dodd, chairman of the Banking Committee who is also running for president. Dodd's staff said yesterday that he would introduce a Senate version today. The earliest lawmakers would act on the proposal is next year.
The Fed next meets on Jan. 30. MarketWatch, TheStreet.com and the Wall Street Journal (subscription) have more on today's rate cuts.
