WASHINGTON – Federal Reserve policymakers today acted to pare the benchmark federal funds rate by half a percentage point, to 4.75 percent. It was the first such rate cut in four years by the Federal Open Market Committee, Bloomberg News said.
“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 FOMC said in a statement announcing today’s actions.
Last month, the panel had cut the discount rate (the rate the Fed charges on direct loans to banks) by half a percentage point, to 5.75 percent – during an emergency teleconference on Aug. 16, spurred by mortgage-market worries and a global stock-market decline (READ MORE). But at that time, it had left the funds rate unchanged.
The Fed’s Board of Governors pared the discount rate today as well, cutting it another half a percentage point to 5.25 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, St. Louis, Minneapolis, Kansas City and San Francisco,” the FOMC statement said.
The decision on the discount rate was unanimous, while the change in the federal funds rate drew 10 votes from the 12-member FOMC, the panel wrote.
“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 panel said. “… Readings on core inflation have improved modestly this year. However, the committee judges that some inflation risks remain ….
“Developments in financial markets since the committee’s last regular meeting have increased the uncertainty surrounding the economic outlook,” the FOMC added, saying it “will act as needed to foster price stability and sustainable economic growth.”
The statement spurred optimism among investors – driving up stock prices – as well as among analysts, most of whom had predicted the funds rate would be trimmed by only half as much.
“We see more cuts ahead,” David M. Jones, chief executive officer of DMJ Advisors in Denver and a former Fed economist, told Bloomberg News. “They have to rebuild confidence, both in terms of lenders and Main Street.”
Additional information, including the full statement issued today by the Federal Open Market Committee, can be found at www.federalreserve.gov.
