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Federal Reserve cuts interest rate by half a point, Washington - The Federal Reserve cut a key interest rate for the first time in four years, starting with an aggressive half-point move to prevent a steep housing slump and turbulent financial markets from triggering a recession. The action triggered a huge rally on Wall Street. The Fed announced Tuesday that it was reducing its target for the federal funds rate, the interest that banks charge each other, from 5.25 percent to 4.75 percent.
The half-point reduction was double the quarter-point move that many had expected and sparked euphoria among investors, who had been worried that the central bank would be too slow in responding to recent market turmoil. Fed's action is designed to boost economic growth by lowering borrowing costs for millions of consumers and businesses. Commercial banks were expected to quickly match the Fed's action by cutting their prime lending rate. The prime rate has been at 8.25 percent for the past 15 months. In explaining its action Tuesday, the Fed said that "the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally." Dow Jones industrial average went up by 335 points or 2.51%. The Fed's action came in the midst of the worst slump in housing in 16 years. That downturn has triggered record defaults in subprime mortgages and roiled financial markets around the globe as investors have become worried about where the spreading credit problems will next appear. "Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time," the Fed said in a brief statement explaining its actions.
Analysts said rate cuts were certainly needed, given spreading weakness in housing, financial market turbulence and a bad August employment report which showed the labor market lost jobs for the first time in four years.
I hope that the Fed's interest rate cut by a half-point will help stabilize the slowdown in housing market and relieve the credit market. However, the full impact of sub-prime mortgage loan may come out in the coming year or two. The stock market will still be volatile. There is still a chance of recession.
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