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Tuesday, Mar. 18 2008
FOMC Slices Key Interest Rate by 0.75%; Fed Funds Rate Now 2.25%
Dunstan Prial, Ken Sweet
FOXBusiness
The Federal Reserve on Tuesday continued its determined efforts to ward off a recession or worse by slashing three-quarters of a point off a key interest rate.
The move clearly reflects the Fed's belief that it needs to do all it can to help alleviate fears that the economy has fallen and can't get up.
Prior to the announcement, economists and Wall Street traders were in disagreement over the size of the Fed's move. But few believed the Fed would swerve from its aggressive approach toward righting the recent economic downturn.
"Fed officials are in full crisis mode and are striving to prevent a collapse," said Maury N. Harris, chief economist at UBS.
The 75 basis point cut will translate immediately into lower rates for consumers and businesses as banks cut their prime lending rate by a similar amount.
Interest rate cuts are designed to prompt spending and push a stagnant economy toward growth.
"We're in the middle of the worst part of the recession," said John Silvia, chief economist for Wachovia.
The federal funds rate, the interest that banks charge each other on overnight loans, now stands at 2.25%, down from 4.25% at the beginning of the year.
That was before global market turmoil in January prompted an emergency three-quarter-point cut on Jan. 22 and a half-point move eight days later, the biggest reductions in a single month in more than a quarter-century.
Stock markets, which had surged earlier Tuesday in anticipation of the cut and on decent earnings from two high profile banks - Lehman Brothers and Goldman Sachs, pulled back.
Financial markets have see-sawed in recent days, jarred by the collapse of Bear Stearns Cos., the nation's fifth largest investment house, which was undone primarily by bad bets on investments tied to now toxic subprime mortgages.
Good news came in the form of JPMorgan Chase & Co. decision to purchasing Bear Stearns at a fire-sale price on Sunday in a deal helped along with a pledge that the Fed would supply a $30 billion line of credit to back up Bear Stearns' assets.
That offer over the weekend was the latest move by a central bank that has been pulling out all of the stops, including using Depression-era procedures, to pump cash into the financial system.
"There is no reason for the Fed not to be aggressive," Mark Zandi, chief economist at Moody's Economy.com told the Associated Press. "The economy is in a recession, the financial system is in disarray and inflation is low."
In other moves, the Fed last week announced that it would lend up to $200 billion of Treasury securities that it owns to investment banks starting March 27 for a period of up to 28 days in return for a like amount of the investment banks' shunned mortgage-backed securities. The Fed also announced recently that it was boosting the size of special loans it has been making since December to commercial banks.
The scale of these actions underscored the threat facing the economy from a severe credit squeeze that began with a wave of defaults on subprime mortgages last year but has now spread to other parts of the credit markets, triggering multibillion-dollar losses by some of the country's largest financial institutions.
Since last fall, when the first rate cuts occurred, the Fed has shown an increasing willingness to move swiftly and broadly to offset crumbling markets. Tuesday's action might not be its last.
"I don't know where the floor is and I don't think the Fed knows either," said Stuart Hoffman, chief economist with PNC Financial Services Group.
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