HomeFederal ReserveFed cuts interest rates to 1 percent, expects inflation to moderate

Fed cuts interest rates to 1 percent, expects inflation to moderate

The Federal Reserve lowered its federal funds rate, the benchmark overnight lending rate at which banks lend to one another, by 50 basis points to 1 percent at Wednesday’s end of month scheduled meeting.

The latest rate is the lowest since 2004 and joins a new round of global cuts. China and Norway also cut rates on Wednesday, and other countries are expected to follow suite in an attempt to change the economic downturn and fight the ongoing crisis in the credit markets.

The Feds newest reduction follows on the heels of its emergency 1/2 percent interest rate cut on October 8 when world central banks first joined in their coordinated efforts to try to stabilize financial markets and ease out of the global credit crunch.

Today’s move was widely expected, although a minority of analysts suggested the Fed could cut rates by three-quarters of a percentage point to 0.75 percent, marking a never before seen low. Immediately following the announcement, U.S. stocks inched lower.

The announcement was made by the Federal Open Market Committee (FOMC), who released the following statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. 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.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, and San Francisco.

The fed funds rate is used to set rates for a wide variety of consumer loans, including home equity lines, credit cards and many business loans. The Fed hopes to spur the economy with the lower rate.

Low rates can also feed inflation, which the U.S. was battling just in July when inflation had grown at its fastest pace in 17 years. However, with drastically falling energy and commodities prices, inflationary pressures have significantly weakened.

The need to spark credit easing has become the Federal Reserve’s main focus, even though inflation is still higher than the Fed’s optimal 1.5 percent to 2 percent comfort zone. Inflation pulled back to 4.9 percent in September and is expected to lower in October.

The FOMC’s next scheduled meeting is on December 16.


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