WASHINGTON, Jan 22: The US Federal Reserve made an unprecedented move on Tuesday – slashing two key interest rates by three-quarters of a percentage point to prevent a market meltdown and recession.
Federal funds rate, which impacts how much consumers pay on credit card debt, home equity lines of credit and auto loans, was reduced from 4.25 percent to 3.5 per cent.
The Fed also lowered its discount rate, which is what it costs banks to borrow directly from the central bank, by three-quarters of a point, to 4 percent.
Market analysts at Thomson Financial predicted that another 50 basis point cut next week is now a near certainty. The Federal Open Market Committee, which takes such decisions, meets again on Jan. 29 and 30.
It was the largest cut in the federal funds rate since 1982. It is also the first time since 9/11, that the Federal Open Market Committee has changed the federal funds target rate outside of a regular meeting.
But the move failed to assuage fears of a recession in the United States. Wall Street plunged at the opening of trading on Tuesday, propelling the Dow Jones industrials down about 400 points.
Global financial markets have fallen precipitously in recent days on fears that bad bets in credit markets could spread further and drive the US economy into recession.
US Treasury Secretary Henry Paulson, however, hoped that the rate cuts would calm nerves at jittery markets around the world.
“This is very constructive and I think it shows this country and the rest of the world that our central bank is nimble and can move quickly in response to market conditions,” he said.
The Federal Open Market Committee, which authorized the rare rate cuts on Tuesday, said it “expects inflation to moderate in coming quarters,” but warned that “it will be necessary to continue to monitor inflation developments carefully.”The committee “took this action in view of a weakening economic outlook and increasing downside risks to growth,” the statement said.
“Short-term risks are clearly to the downside,” admitted Secretary Paulson,
“There can be no doubt that the timing of this morning’s move is aimed at supporting global financial markets after yesterday’s global equity meltdown,” wrote Joshua Shapiro, chief economist at MFR Thomson Financial News.
Analysts pointed out that the rate cuts showed the committee is much more concerned about the financial markets and the economy slipping into recession than it was just a month ago, when it cut its target for the federal funds rate by a quarter percentage point to 4.25 per cent.
They hoped that over time, rate cuts would stimulate economic growth.
