Fed Slashes Rates Yet Again

The Federal Reserve cut the federal funds rate a half-percentage point today, marking the second rate decrease in just over a week. The announcement this afternoon that the Fed would lower the federal funds rate from 3.5 percent to 3.0 percent came on the heels of last Tuesday’s emergency cut from 4.25 percent to 3.5 percent. The Fed also lowered the discount rate–the interest charged to banks borrowing directly from the central bank–from 4.0 percent to 3.5 percent today. Even with last week’s emergency announcement, today’s cut came as little surprise to most industry observers and players, given the growing indicators of possible recession on the horizon. According to Gary Gabriel, managing director of the capital markets group at Cushman & Wakefield Inc., the rate decrease came as welcome news to the financial markets. “(The rate cut) was expected and desired by all participants in the financial markets,” he said, noting that, although some might view it as a “bailout” by the Fed, the cut was more a “function of continued concerns over credit markets and the rapid deterioration of growth.” Indeed, the latest report of GDP growth–issued just this morning–indicated a considerable slowdown during the final quarter of 2007, when GDP grew by just 0.6 percent, far below expectations and the sharpest quarter over quarter growth decline since 2003. And problems in the credit, job and single-family housing markets persist, providing much of the impetus for the $150 billion stimulus plan currently being mulled over in Congress. However, there have also been signs of inflation in the economy as of late, such as an increasing consumer price index and rising cost of commodities. Gabriel said that the Fed would likely keep a close eye on such indicators when considering any future rate cut. “Our sense is that, with the broad application of stimulus which the Fed is undertaking,” Gabriel said, “there is going to be some fairly solid support beneath prices at this level.” He noted that, should commodity prices and the consumer price index continue to rise, the Fed could be given pause when considering any further rate cuts. “Going forward, the psychology will begin to shift … it will be hard for the Fed to keep cutting while prices are rising.” In its statement released this afternoon, the Fed acknowledged that inflationary risks would be monitored closely, but that the majority of members expected inflation to moderate in the near future.