Fed orders emergency rate cut to 1.5 percent
October 08, 2008
WASHINGTON (AP) - The Federal Reserve, acting in coordination with other
global central banking authorities, cut a key U.S. interest rate by half a
percentage point Wednesday to steady an economy teetering on a collapse
reminiscent of the 1929 stock market crash.
Fed Chairman Ben Bernanke and his colleagues ratcheted down their key rate
by 0.5 percentage point to 1.5 percent. The action revives the central bank's
rate-cutting campaign which had been halted in June out of concerns that those
low rates would worsen inflation. Since then, however, economic and financial
conditions have dangerously deteriorated, forcing the Fed to reverse course.
The fact that the Fed felt it couldn't wait until its regularly scheduled
meeting on Oct. 28-29, underscored the urgency of the situation.
The Fed took the action in a coordinated move with other central banks,
which also were cutting their rates.
"The pace of economic activity has slowed markedly in recent months," the
Fed said "Moreover, the intensification of financial market turmoil is likely to
exert additional restraint on spending, partly by further reducing the ability
of households and businesses to obtain credit."
Although inflation has been high, the Fed believes that the recent drop in
energy prices and the weaker prospects for economic activity have reduced this
threat to the economy.
In Europe, which also has been hard hit by the financial crisis, the Bank of
England cut its rate by half a point to 4.5 percent, while the European Central
Bank sliced its rate to 3.75 percent.
In addition, the Fed reduced its emergency lending rate to banks by half a
percentage point to 1.75 percent. Given the intense credit crisis, banks have
been ramping up their borrowing from the Fed's emergency "discount" window.
In response, the prime lending rate for millions of borrowers will drop by a
corresponding amount. The prime rate applies to certain credit cards, home
equity lines of credit and other loans.
The hope was to spur nervous consumers and businesses to spend more freely
again. They clamped down as housing, credit and financial problems intensified
last month, throwing Wall Street into chaos. Many believe the country is on the
brink of, or already in, its first recession since 2001.
The Fed's last rate cut was in late April, capping one of the most
aggressive rate-cutting campaigns in decades as it scrambled to shore up the
faltering economy. After that, the Fed moved to the sidelines, holding rates
steady as zooming food and energy prices during that period threatened to ignite
inflation. In the past few months, energy prices have retreated from record
highs reached in mid-July, giving the Fed more leeway to drop rates again.
At its last meeting in September, the Fed struck a more dire tone about the
economy, hinting that a rate reduction once again could be in the offing.
Even with the unprecedented $700 billion financial bailout quickly signed
into law by President Bush on Friday, the failing economy and the jobs market
probably will get worse. Many believe the economy will jolt into reverse later
this year -- if it hasn't already-- and will stay sickly well into next year.
One of the most crucial pillars of the economy -- the jobs market -- has
cracked, and wage growth is slowing. This means that consumers will be even more
hard-pressed to spend in the fashion that helps grow the economy.
Increasingly skittish employers slashed payrolls by 159,000 in September,
the most in more than five years. A staggering 760,000 jobs have disappeared so
far this year. The unemployment rate is 6.1 percent, up sharply from 4.7 percent
a year ago.
The unemployment rate could hit 7 or 7.5 percent by late 2009. If that
happens, it would mark the highest rate of joblessness since the months
immediately following the 1990-91 recession. Some economists say the jobless
rate could rise even more before the situation starts to get better.
Mounting job losses, shrinking paychecks, shriveling nest eggs and rising
foreclosures all have weighed heavily on American voters. The economy is their
No. 1 concern, polls have shown.
Spooked consumers and businesses have pulled back so much that some analysts
fear the economy stalled -- or even worse, shrank -- in the July-to-September
quarter. Many predict the economy will contract in both the final quarter of
this year and the first quarter of next year, meeting the classic definition of
a recession.
The financial crisis that intensified in September is forcing a seismic
shake-up on Wall Street.
Lehman Brothers, the country's fourth-largest investment bank, filed for
bankruptcy protection. A weakened Merrill Lynch, deciding it couldn't go it
alone anymore, found help in the arms of Bank of America. American International
International Group was thrown a financial lifeline. And, the last two
investment houses -- Goldman Sachs and Morgan Stanley -- decided to convert
themselves into commercial banks to better weather the financial storm. The
number of banks that have failed this year are up sharply from last year. On
Friday, Wachovia Corp. said it will be acquired by Wells Fargo & Co. wiping out
Wachovia's previous plan to sell its banking operations to rival suitor
Citigroup Inc.
global central banking authorities, cut a key U.S. interest rate by half a
percentage point Wednesday to steady an economy teetering on a collapse
reminiscent of the 1929 stock market crash.
Fed Chairman Ben Bernanke and his colleagues ratcheted down their key rate
by 0.5 percentage point to 1.5 percent. The action revives the central bank's
rate-cutting campaign which had been halted in June out of concerns that those
low rates would worsen inflation. Since then, however, economic and financial
conditions have dangerously deteriorated, forcing the Fed to reverse course.
The fact that the Fed felt it couldn't wait until its regularly scheduled
meeting on Oct. 28-29, underscored the urgency of the situation.
The Fed took the action in a coordinated move with other central banks,
which also were cutting their rates.
"The pace of economic activity has slowed markedly in recent months," the
Fed said "Moreover, the intensification of financial market turmoil is likely to
exert additional restraint on spending, partly by further reducing the ability
of households and businesses to obtain credit."
Although inflation has been high, the Fed believes that the recent drop in
energy prices and the weaker prospects for economic activity have reduced this
threat to the economy.
In Europe, which also has been hard hit by the financial crisis, the Bank of
England cut its rate by half a point to 4.5 percent, while the European Central
Bank sliced its rate to 3.75 percent.
In addition, the Fed reduced its emergency lending rate to banks by half a
percentage point to 1.75 percent. Given the intense credit crisis, banks have
been ramping up their borrowing from the Fed's emergency "discount" window.
In response, the prime lending rate for millions of borrowers will drop by a
corresponding amount. The prime rate applies to certain credit cards, home
equity lines of credit and other loans.
The hope was to spur nervous consumers and businesses to spend more freely
again. They clamped down as housing, credit and financial problems intensified
last month, throwing Wall Street into chaos. Many believe the country is on the
brink of, or already in, its first recession since 2001.
The Fed's last rate cut was in late April, capping one of the most
aggressive rate-cutting campaigns in decades as it scrambled to shore up the
faltering economy. After that, the Fed moved to the sidelines, holding rates
steady as zooming food and energy prices during that period threatened to ignite
inflation. In the past few months, energy prices have retreated from record
highs reached in mid-July, giving the Fed more leeway to drop rates again.
At its last meeting in September, the Fed struck a more dire tone about the
economy, hinting that a rate reduction once again could be in the offing.
Even with the unprecedented $700 billion financial bailout quickly signed
into law by President Bush on Friday, the failing economy and the jobs market
probably will get worse. Many believe the economy will jolt into reverse later
this year -- if it hasn't already-- and will stay sickly well into next year.
One of the most crucial pillars of the economy -- the jobs market -- has
cracked, and wage growth is slowing. This means that consumers will be even more
hard-pressed to spend in the fashion that helps grow the economy.
Increasingly skittish employers slashed payrolls by 159,000 in September,
the most in more than five years. A staggering 760,000 jobs have disappeared so
far this year. The unemployment rate is 6.1 percent, up sharply from 4.7 percent
a year ago.
The unemployment rate could hit 7 or 7.5 percent by late 2009. If that
happens, it would mark the highest rate of joblessness since the months
immediately following the 1990-91 recession. Some economists say the jobless
rate could rise even more before the situation starts to get better.
Mounting job losses, shrinking paychecks, shriveling nest eggs and rising
foreclosures all have weighed heavily on American voters. The economy is their
No. 1 concern, polls have shown.
Spooked consumers and businesses have pulled back so much that some analysts
fear the economy stalled -- or even worse, shrank -- in the July-to-September
quarter. Many predict the economy will contract in both the final quarter of
this year and the first quarter of next year, meeting the classic definition of
a recession.
The financial crisis that intensified in September is forcing a seismic
shake-up on Wall Street.
Lehman Brothers, the country's fourth-largest investment bank, filed for
bankruptcy protection. A weakened Merrill Lynch, deciding it couldn't go it
alone anymore, found help in the arms of Bank of America. American International
International Group was thrown a financial lifeline. And, the last two
investment houses -- Goldman Sachs and Morgan Stanley -- decided to convert
themselves into commercial banks to better weather the financial storm. The
number of banks that have failed this year are up sharply from last year. On
Friday, Wachovia Corp. said it will be acquired by Wells Fargo & Co. wiping out
Wachovia's previous plan to sell its banking operations to rival suitor
Citigroup Inc.
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