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Fed Cuts Key Interest Rate By Quarter Point; Stocks Fall
Federal Reserve Board Chairman, Ben Bernanke, speaks at the CATO Institute's annual Monetary Conference in Washington in this Nov. 14, 2007 file photo. Twice the Fed has cut rates this year and officials suggested in October that might be enough for the year to help the economy survive all that stress. Then the problems snowballed, leading Bernanke to signal one more cut might be needed. Analysts expect the Fed to trim its key rate, now at 4.5 percent, by one-quarter of a percentage point at their next meeting . AP Photo/Caleb Jones, File)
(Caleb Jones - AP)
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The dissents in opposite directions suggest that Fed leaders have more varied views than usual on which policy to pursue -- differences that may boil down to how likely they think it is that problems in the credit market will slow the economy significantly next year. The differences appear to come out of the same uncertainty that has made forecasting such a challenge.
"There's obviously a camp within the Fed that is very concerned about inflation and a camp that is more concerned about the downside risk of growth," said PNC's Dye.
Starting in July, a rapidly deteriorating housing market in the U.S. caused massive losses and uncertainty about risky, complicated debt securities around the world. Some of the world's largest financial institutions have taken multibillion-dollar write-downs from these losses. This week, the giant Swiss bank UBS joined the list, writing its investment portfolio down by $10 billion.
The credit turmoil has caused the housing market to tighten further, and while the economy grew at a speedy 4.9 percent annual rate in the third quarter, it is slowing now and is widely expected to slow further in 2008. The odds that the United States will experience a recession have risen sharply in recent months, according to surveys of economists.
Bernanke, navigating his first crisis as chairman, led an aggressive half-percentage-point interest rate cut in September, trying to ease fears of a recession. The Fed cut rates again, by a quarter-point, on Oct. 31, though that decision was a "close call," according to minutes of the meeting.
At the time, the policymakers sent strong signals they were disinclined to cut rates again -- that the risks of higher inflation and lower growth were "roughly balanced." But since then, conditions in world credit markets have worsened significantly.
Indeed, lenders are charging higher interest rates for many kinds of loans, including short-term loans between banks, that have counteracted the impact of the Fed rate cuts and made credit less available. That was probably part of the central bankers' rationale for cutting again, economists said.
But it also viewed its previous rate cuts as "front-loading" its efforts to prevent a recession, economists said, which may be why it made a smaller cut yesterday. "They've now cut a full percentage point at three meetings," said Vincent Reinhart, a resident fellow at the American Enterprise Institute who was until recently a senior economist at the Fed. "They want everybody to look at the cumulative policy action."
