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Fed Cuts Rates by One Half Point
Acknowledging the growing concern over a recession which was cemented by the August jobs report, the Fed cut both the Fed Funds and the Discount Rate today by one half point.
Here is the text of the statement:
The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.
Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.
Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric Rosengren; and Kevin M. Warsh.
In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City, and San Francisco.
The Fed signaled that further cuts could be coming if the credit crunch shows up in the economic figures. Mortgage rates had already priced in a cut, the Fed’s indication of further cuts could help mortgage rates, but money will be flowing out of bonds and into stocks today, creating volatility until the markets settle down in the aftermath.
September 18th, 2007 at 7:42 pm
What will happen the rest of the year. I heard Greenspan saying the “happy” part of this credit cycle was over and that he saw the 10 year Note hitting 8%+.
That clashes a bit with this euphoria.
September 19th, 2007 at 9:03 am
Hopefully, long term mortgage rates will stabilize or go a little lower. The yield curve is steepening, and that might help the 5/1 & 7/1 ARM rates fall. Those mortgage rates are usually lower, offering a solid alternative for those whose expected holds are shorter. They haven’t been much help recently.
Also, the lower rates will help folks with home equity 2nds and those whose 3/1, 5/1, 7/1 ARMs are due to reset.
September 21st, 2007 at 12:06 pm
Hello Marc,
I am shopping for a loan at the moment, I wanted to inquire if the fed rate cut will have an influence on the 30 yr fixed rate mortgages or perhaps a trickle down effect. I am confused about moving forward or holding. I already have a few properties picked out and I am assuming they will be on the market as its the end of 3rd quarter and with the holiday season & end of the year coming up, I don’t believe they will move.
Thanks
October 4th, 2007 at 10:50 am
Gulraj, as you probably know by now, the half point Fed cut was a surprise to the market…and not a good one. While the bond market expected, and had already priced in, a quarter point cut, the larger drop was viewed as potentially inflationary. Rates then rose.
Since then, things have been fairly stable. Tomorrow’s employment report is key to guessing the market’s direction from here. Greenspan recently stated that he expects to see the 10 year Note over 8%. It’s currently at 4.5%. If that happens, the 30 year fixed rate will rise.
Don’t wait too long!