Tuesday, December 11, 2007

Fed cuts rates by quarter point

Here's the latest on the Fed rate cuts, as well as some analysis on what Fed rate cuts might mean for the US economy.

From Reuters, "Fed cuts key interest rate by quarter point":

WASHINGTON (Reuters) - The Federal Reserve cut a key interest rate by a quarter-percentage point on Tuesday to help the U.S. economy withstand tightened credit and a prolonged housing slump.

The central bank's decision takes the bellwether federal funds rate target down to 4.25 percent. While the action was widely expected, some economists had thought the Fed might offer a bolder half-point reduction in the rate, which governs overnight lending between banks.

In a related move, the Fed trimmed the discount rate it charges for direct loans to banks by a matching quarter point to 4.75 percent.

Anyone interested in reading the FOMC statement and related news should click on the article link above.

Will the Fed's actions help bail out the US economy? Nadeem Walayat takes up this topic in an article entitled, "Deep Fed Rate Cuts Mean No US Recession in 2008".

Here's a sample from that piece:

The US Fed will continue cutting interest rates during 2008, regardless of the consequences to the US dollar and inflation (which has a little further to rise going into 2008). The cuts are ensured by the worst housing market conditions since the great depression which is a harbinger of a deep recession unless emergency preventative action is taken now. Therefore the primary observable goals of the interest rate cuts are to:

a. Stabalise the US housing market

b. Unfreeze the interbank money markets and for the credit markets to start operating normally.

Nadeem goes on to note that Fed actions to date are signs of an "emergency action" and that this suggests Fed rate cuts will be deeper than most current expectations.

Bob Hoye of Institutional Advisors has noted in the past that the Fed actually follows the market, causing short-term Fed-watchers and market participants to celebrate while paving the way for short-term market rallies.

In a recent interview with HoweStreet.com, Hoye explained that while he expects further interest rate cuts by the Fed and an ensuing short-term rally, it's really an academic myth that Fed-induced rate cuts are a sign of prosperity. In fact, history actually shows that short-dated market rates of interest go up with boom periods.

So there's a little something to mull over as the media goes ga-ga over the latest Fed rate cuts. Hope you've found the added perspective on these rate moves helpful.