WASHINGTON, Oct. 29, 2008
Fed Cuts Key Interest Rate By Half-Point
In Effort To Thwart Recession, Central Bank Slashes Federal Funds Rate To 1 Percent
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(AP)
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Play CBS Video Video MoneyWatch The Federal Reserve slashed its interest rates for the second time in a month, dropping its key rate by half a point. Alexis Christoforous reports on today's top business stories.
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Video Pound Plummets, House Prices Sink In Britain, the country's struggling economy has caused the pound to plummet against the dollar and property prices have plunged by 30 percent, far faster than in the U.S. Charlie D'Agata reports.
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Interactive Inside The Fed A history of the Federal Reserve, glossary of terms and a look at changing interest rates.
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Interactive Eye On The Economy In-depth features on U.S. markets, taxes, employment and the Federal Reserve.
The central bank on Wednesday reduced its target for the federal funds rate, the interest banks charge on overnight loans, to 1 percent, a low last seen in 2003-2004. The funds rate has not been lower since 1958, when Dwight Eisenhower was president.
The cut marked the second half-point reduction in the funds rate this month. The Fed slashed the rate by that amount in a coordinated move with foreign central banks on Oct. 8.
"The cut is a signal that we're in this to make sure that it works and we're asking you to rely on us," Barron H. Harvey, dean of Howard University Business School, told CBS News.
In a brief statement explaining Wednesday's action, the Fed said that the "intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and business to obtain credit."
The central bank said that "downside risks to growth remain" holding out the promise of further rate cuts if needed. The rate-cut decision was unanimous.
Federal Reserve Chairman Ben Bernanke and his colleagues pledged that they would "monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."
As news of the rate cut came down, a small army of distressed homeowners marched on the Washington headquarters of Fannie Mae, reports CBS News business correspondent Anthony Mason, dumping their furniture on the front lawn.
"They call it the American Dream. Well, for us, it's the American nightmare," said protester Deborah Cumbo.
Wall Street had staged its second biggest point surge ever on Tuesday with the Dow Jones industrial average climbing by 889 points in anticipation of the Fed's action. Trading was more subdued on Wednesday with the Dow actually slipping into negative territory immediately after the announcement, before surging up by about 200 points in late-afternoon trading. The Dow eventually closed trading down 74 points.
To keep Wall Street and investors looking good, the Bush administration is pushing banks to lend the money they received as part of the $700 billion rescue package, Bloomberg TV's Deirdre Bolton told CBS' The Early Show.
Many analysts said they believe the Fed will not stop at 1 percent if officials see the need to cut rates further. Some are forecasting another half-point move at the Fed's last meeting of the year on Dec. 16.
But other economists said with rates already so low, the Fed may decide to hold at 1 percent, leaving some room for a further reduction if needed next year should the country's economic troubles intensify.
David Jones, chief economist at DMJ Advisors, said the Fed's rate cut will be followed over the next week by similar action in other major countries as they grow more concerned that the recession that began in the United States is spreading to their regions.
But he said a section of the Fed's statement where it listed all the efforts taken so far to battle the slowdown was a signal the central bank believes it has done enough for now.
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Other economists disagreed, saying the Fed clearly lowered its worries about inflation while raising concerns about economic growth.The cut is a signal that we're in this to make sure that it works and we're asking you to rely on us.
Barron H. Harvey, dean of Howard University Business SchoolSung Won Sohn, an economist at the Smith School of Business at California State University, said he believed the Fed will make the "momentous decision" to move the funds rate to zero if events in coming months show such an action is needed to battle the global credit crisis.
In its statement, the Fed indicated it had room to lower rates because the spreading economic weakness was lowering the risks that inflation would get out of control. Indeed, the weakness has caused dramatic declines in the price of oil and other commodities.
While many economists believe the country has already fallen into a recession, they think the aggressive efforts by the Fed to cut rates and take other actions to unfreeze credit markets will keep the country from plunging into a prolonged and deep downturn.
The Fed's action was expected to be quickly followed by a reduction by commercial banks in their prime lending rate, the benchmark for millions of consumer and business loans, by a similar half-point.
The central bank also announced that it was lowering its discount rate, the interest it charges to make direct loans to banks, by a half-point to 1.25 percent. This rate has become increasingly important as the central bank has dramatically increased direct loans to banks in an effort to break the grip of the credit crisis.
Bernanke pledged in a speech earlier this month that the Fed "will not stand down until we have achieved our goals of repairing and reforming our financial system and restoring prosperity."
In addition to the rate cuts, the Fed has been moving to pump billions of dollars into the banking system to help unfreeze markets that seized up in dramatic fashion last month. The ensuing meltdown of financial markets caused the Bush administration to successfully lobby Congress to pass on Oct. 3 a $700 billion rescue package to make direct purchases of bank stock and buy up bad assets as a way of getting financial institutions to start lending again.
That money started flowing earlier this week with $125 billion going to nine of the nation's biggest banks. Other industries, including automakers and insurance companies, are in talks with the administration to get a share of the bailout funds.
And there is pressure from lawmakers to deploy some of the bailout resources to provide mortgage guarantees to encourage more banks to rework home loans to stem a record tide of foreclosures.
© MMVIII, CBS Interactive Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.
Best-selling author Mitch Albom on his first nonfiction work since "Tuesdays with Morrie."
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See all 27 CommentsLets make it easier for people to borrow money...
Posted by whitemale08 at 05:30 PM : Oct 29, 2008
How about cows, goatsc sheep and chickens; or perhaps a trade like carpentry, welding, printing, or something other skill. Just like they did in the middle ages.
Posted by roach9703 at 05:44 PM : Oct 29, 2008
Sounds like Communism. Next thing you''re going to suggest that the government put a halt to no-bid defense contracts.
Posted by swingset4u at 10:48 PM : Oct 29, 2008
And beleive me, if something goes terribly wrong and interest rates spike like then did in the early eighties, than a 7.5% mortgage will be extremely attractive. But of course, your job at $10 and hour may change.
Everyone who wants the best deal, and wants it to change with the economic tides, wants the best of all worlds. Socialism will make the American way of life a no risk society.
Posted by redmurl
This is why I don''t understand for the LIFE of me why anyone would want an ARM loan! This is why people are losing their houses. Gambling on the future. I have a 7.5% mortgage and my payment DOES NOT change. I''m okay and I only make 10.00 an hour on a 40 hour week. I live within my means.
We have given away our technological advantage in the name of profit, by outsourcing jobs and moving factories overseas. There''s really not much Americans do that cannot be done by someone else in another country at 1/10th the labor cost. Of course some jobs require that a physical body be here (Wal-mart greeter, perhaps?), but they''re working on doing away with that also. Notice that supermarkets are putting in "self-checkout" isles. I suspect they''ll start doing more of that for other businesses also, eliminating jobs wherever they can. Even high-skilled business and technical jobs like IT and management can be outsourced. I know a company who, after moving their manufacturing plant abroad, has begun moving their business and management components as well.
All this may lower costs for consumers, but there''s only one problem with that. For one thing, the consumer needs to have a job and a decent income in order to consume. And the savings only apply to relatively small-ticket items. The real costs, like health care and housing and education, continue to explode.
The only competitive advantage we seem to still have is making weaponry. Maybe we can secretly start conflicts in other countries so that we can sell weapons to them. Maybe we are already doing that.
The government needs to reorganize and discipline spending. The main focus should be rebuilding infrastructure such as highways, railroad beds, and airports. Other areas will need to cut. Defensive spending must be made less wasteful.
The sooner the governments of the world get their fiscal house in order, the better off all of us will be.
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Posted by jamesm12341 at 04:06 PM : Oct 29, 2008--
Since 1972 when we took ourselves off the gold standard and entered a post-Bretton Woods era of ''fixed exchange rates'' we have been bleeding ''Real Jobs''.
Working on Wall Street to structure debt for hedge funds and buy out firm is not productive work and it''s not a "Real Job" you idiot.
"Real Jobs" are defined as "real work" that constructs and contribute to permanent infrastructure and developments that enable avereage workers to better their lives and save ''real wealth'' for their retirement.
Not ''stocks'' or ''paper money'' but ''real wealth'' like property, gold and silver and any precious belongings that can be passed on to one''s own childeren.
You''re not qualified to even talk to me about this subject.
Posted by fulghum2 at 04:07 PM : Oct 29, 2008
Words just do not discribe the stupidity of this comment. I am amazed that anyone could be as dumb as you and still breath the air.
My god have you been in a hole the last 8 years. This is not the Democrats fault it is the Republicans fault why do you think the senate is about to fall as well as 30 more seats in the house. It will not matter who is President after the eleciton the most powerful people in Washington will be Nancy and Harry. I don''t care if you wing nuts like it or not but it is over. The ride you took America on is done.
Have a bad day and week.
Posted by fulghum2 at 04:07 PM : Oct 29, 2008
Democrats?!?
Have you noticed the unemployment rate lately?
Have you seen how many companies have closed shop, and moved their operations overseas in the last 8 years?
Did you see that were giving the big three automakers $25 BILLION dollars to upgrade their plants so that they''re competitive, and some of those plants that they plan on upgrading with that money, are in MEXICO and CANADA?!?!
And then they had the BALLS to come back and ask for $15 BILLION MORE?!?!
And you blame the democrats?!?!
Posted by bob5ford at 02:43 PM : Oct 29, 2008
I suggest doing like the other countries around the world do - import taxes, tariffs, and fees.
If a company wants to close shop and move to Mexico, then let them pay a heavy import tariff, until doing business here, is as competitive as doing it there. It is the ONLY was to prevent companies from "offshoring". And if other countries can do it to our goods, then we can do it to theirs.
Any money collected through the new fees, taxes, and tariffs, can be turned into "economic development money", which will help streamline America''s businesses.
These fed rate cuts do nothing to help main street. The banks are too greedy to share.
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Posted by bob5ford at 02:43 PM : Oct 29, 2008--
The way government can help create ''REAL JOBS'' is 3 step process....
1. Raise Interest Rates on consumption to discourage it and rather encourage savings.
2. Have a 2nd tier Interest Rate like under FDR which will be lower for government credit into investments for infratructure, energy development, machine tool manufacturing, agriculture and major projects like mag-lev train systems.
3. Tax and regulate out of existince all of the so-called investors on Wall Street who do absolutely nothing productive but speculate on ''debt''. We need to shut-down the ''debt markets'' permanenty and get rid of these parasites, ticks and fleas like the so-called monarchies of Europe and oligarchs who sit there and suck off the blood of everyone else who works for a living.
We do that, then we will have "Real Jobs" in this country. I hope that answered your questions.
Ya don''t?
Me, either.
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