Federal Reserve cut its interest rate by half a
percentage point as it seeks to help economy get back.
The Fed said 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."
Fed also suggested that risk still remains and it is
open for further rate cuts if necessary. Half a percentage point cut
was prepared carefully as Fed might be moving as low as 0.5% for Fed
Funds rate. Their next meeting will be Dec.16
There are indications in a released statement by Fed
that do indeed have a room to cut rates again as recession is
spreading. Aggressive efforts by Fed will allow banks to start
borrowing again and it will lower interest rates on loans offered by
those banks.
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."
With rate cuts Fed has been providing billions of
dollars to banks in effort to allow banks borrowing again, thus
unfreezing their credit lines.
This week $125 billion will be used to buy preferred
shares of nine largest banks and other industries from insurance,
automakers are in talks to get a share of a bailout.
Fed is also spending $30 billion to create
credit lines for Brazil, Mexico, South Korea and Singapore to help
those countries deal with the global credit crisis.
The Fed will provide up to $30 billion to each of the
central banks. It is the latest in a series of "swap" arrangements
where the Fed provides dollars in exchange for reserves of the other
nations' currencies.
Rate cut however, did not give boost to the market as
it quickly turned into a negative territory after the end of the
trading day. Fed is running out of a room as current rate stands at
1%. Half a point cuts are expected before it runs out.
Even with a rate cut there is a little to none benefit
to consumers as banks are not easing their lending policies. Even
with lowered Fed Funds rate, most credit card holders should see a
reduction in their interest. However, banks may not reduce any
interest at all. This will not help economic activity and keep
recession at minimum.
Consumers also see huge problems of obtaining credit
and with slowing economy many consumers will not be able to spend as
they used to.
It is expected that Fed will cut rates by 25 basis
point on Dec.16, bringing Fed Funds rate to 0.75% with prime rate
following accordingly.
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