DJ Fed Cuts Fed Funds Rate To 4.75%; Cites Econ Uncertainty
Date: 09/18/2007 13:15
By Brian Blackstone and Henry J. Pulizzi
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--The Federal Reserve on Tuesday began its first easing cycle in more than four years with an aggressive half-point reduction in the federal funds rate to combat the effects of a housing recession and credit crunch on the broader economy.
Their willingness to move aggressively despite scant evidence of a sharp slowdown could fuel hopes for many more rate reductions down the road.
The Federal Open Market Committee voted unanimously to cut the fed funds rate, the rate at which banks lend to each other, to 4.75% from 5.25%. It had stood at 5.25% for more than one year.
The decision surprised many on Wall Street who expected a more modest reduction. In a Dow Jones Newswires poll taken last week, 11 primary dealer banks said they only expected a quarter-point cut, while seven forecast a half point.
The Fed also lowered the discount rate it charges banks that borrow directly from the Fed by 50 basis points to 5.25%. Last month, officials cut the discount rate by 50 basis points in a rare intermeeting move and modified rules to encourage use of that facility.
"Today's action is intended to forestall some of the adverse effects on the broader economy that might otherwise arise from the disruption in financial markets and to promote moderate growth over time," the Fed said in an accompanying statement.
The Fed also said core inflation has improved "modestly" but that some risks remain.
But the worry is clearly on the economy.
The last time the Fed cut rates was June 2003, a 25-basis-point cut that capped a two-and-a-half year easing cycle that brought the fed funds rate from 6.5% to a five-decade low of 1%.
The aggressive move Tuesday suggests officials are worried about potential spillovers from housing and credit conditions on the overall economy, even though evidence of a big effect has been limited thus far.
The economy has slowed, but there is no concrete evidence that it is near recession, and economic growth forecasts remain centered in the 2% to 2.5% range. Housing remains a big negative that will likely get worse. But international trade is a sizeable plus, judging by the July trade report.
And though retail sales were below expectations last month, the consumer seems to be holding up so far.
But officials signaled worry nonetheless.
"Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally," the Fed said.
Officials may have been spooked by last month's 4,000 decline in nonfarm payrolls, which was the first in four years and the catalyst that had pushed many Fed watchers into the 50-basis-point camp.
Fed watchers had interpreted recent comments by Fed Governor Frederic Mishkin and San Francisco Fed President Janet Yellen as making the case for an aggressive start to the easing cycle. But other officials, including Thomas Hoenig of Kansas City and Richard Fisher of Dallas, have alluded to the economy's bright spots, suggesting they would have been wary of cutting rates aggressively.
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