Fed’s Emergency Rate Cut is Biggest in 23 Years
- Jan 22, 2008
The Federal Reserve slashed the federal funds rate by three quarters of a percentage point this morning, the largest single rate cut since October of 1984. The move by the Fed to drop the rate from 4.25 percent to 3.5 percent came at an unscheduled meeting Tuesday, just over a week before the next scheduled meeting on Jan. 30. The Fed also lowered the discount rate, or the rate at which banks can borrow from the central bank, by three quarters of a point, to 4.0 percent. Gary Gabriel, managing director of the capital markets group at Cushman & Wakefield Inc., said that both the timing and the magnitude of the rate cut indicate that the Fed wants to convey that it is concerned about an economic slowdown and is willing to take whatever steps are necessary to try and head off a possible recession. “When you consider the data that has come out as of late and the persistent challenges of the credit markets,” Gabriel noted, “a reaction of some magnitude by the Fed could have been expected.” He pointed to December’s weak employment and retail sales performances as amongst the data that spurred the Fed to make the cut. Gabriel (pictured) noted that, by making a three quarter point cut, the Fed was likely making a statement. “A 25 or 50 basis point cut would have been perceived as more of the same,” he said, “and they wanted to send a message.” The rate cut aims to engender confidence in the U.S. economy not just domestically, but internationally as well. “I think the markets, globally, were looking for some support for the U.S. economy,” Gabriel said. Indeed, the cuts came just a day after international markets declined sharply while the U.S. market was closed for the Martin Luther King Jr. holiday. Stocks tumbled on Wall Street immediately following the announcement, but by the earlier afternoon had bounced back a bit. The emergency rate cut was the first since the wake of the Sept. 11, 2001 terrorist attacks, when rates were slashed amidst the ensuing financial panic. The Fed still plans to meet on Jan. 30, and many observers expect yet another rate cut at that time.