Fed cuts interest rate

March 18, 2008 3:33:57 PM PDT
The Federal Reserve on Tuesday slashed a key interest rate by three-fourths of a percentage point, moving aggressively to contain a credit crisis threatening to push the country into a severe recession.The latest action brought the federal funds rate - the interest that banks charge each other - down to 2.25 percent, the lowest point since late 2004. It marked the second back-to-back cuts of three-fourths of a percentage point.

Fed Chairman Ben Bernanke and his colleages have now cut the funds rate six times since last September, with the reductions becoming more aggressive since January as the central bank has faced growing turmoil in global financial markets.

In Jacksonville, Fla., Tuesday, President Bush said the government will take further action - if necessary - to help the sagging economy.

The rate cut Tuesday caps an unprecedented period of Fed actions aimed at trying to stabilize financial markets and ward off a recession or at least keep it from being too severe.

While the cut was larger than the Fed's normal quarter-point moves, markets dropped sharply in the moments after the announcement, with investors disappointed that the central bank did not cut rates by a full percentage point.

The Dow Jones industrial average fell 100 points within two minutes of the Fed's mid-afternoon announcement. It had been up 286 points just before the annoucenment as stocks had posted a strong rally after Lehman Brothers and Goldman Sachs reported better-than-expected results for the first quarter. That came as welcome news following the collapse over the weekend of Bear Stearns, which was forced into a fire-sale to JP Morgan Chase & Co.

The reduction in the funds rate was designed to lower borrowing costs and boost spending by consumers and businesses and thus increase economic activity. Economic growth slowed to a near standstill in the final three months of this year as the economy was hit by a series of blows including the credit crunch, a prolonged housing slump, rising unemployment and surging energy prices.

The funds rate cut quickly triggered announcements from commercial banks that they were cutting their prime lending rate to 5.25 percent from 6 percent, where it was before the Fed meeting. This rate is the benchmark for millions of business and consumer loans.


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