Fed Cuts Rate by Half Percentage Point

The Fed cut interest rates by half a percentage point this afternoon, citing “tightening of credit conditions” that have the potential to “intensify the housing correction.”

For consumers, the half point cut could mean lower rates for mortgages, auto loans and HELOCs.

Here’s the Fed’s 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.

Here’s a round up of predictions and one of reactions to today’s rate cuts from the WSJ Econ blog.

Federal Open Market Committee Statement [FRB]

Comments

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  1. Cowboys_fan says:

    So the solution to debts created by lax lending practices, is to make it easier to borrow money!?

  2. Sir Winston Thriller says:

    @Cowboys_fan:
    That’s the American Way! Spending our way to insolvency!

  3. SilverStar95 says:

    I don’t see this as doing too much good at this point. Looking at xe.com it looks like the USD and CAD are only about 1.5 cents away from being par. After the CAD was down by a whole 30 cents just a few years ago.

    Once the dollars hit par and continue moving in the opposite direction, the news is going to have a huge psychological effect on Americans, who have made it a pass-time to laugh about the “low” value of the Canadian dollar.

    If you compare to more international charts, it’s plain to see that the US dollar is plummeting in value globally, greatly weakening the international purchasing power of the greenback, while the US government has largely sat back and allowed “market forces” to dictate the inflation rates, without doing anything to increase the minimal wage earned by a typical individual.

    Then again, at this point there really isn’t anything that can be done to strengthen the US economy, short of bringing all those outsourced jobs back to the nation and becoming the world’s #1 exporter of inexpensive, high quality goods, rather than one of the highest importers. The cumulative interest rate on the massive war budget loans have ensured that the US economy will remain slagged until things fall apart to the point where they might be able to request a pardon on the loans, as have been seen from other countries such as Africa, when the debt is simply more than the GDP.

  4. OKH says:

    No, just to make it cheaper for banks to loan each other money overnight.

  5. Beerad says:

    Would anyone care to speculate wildly (as if I need to ask) about whether this will actually have a direct impact on mortgage rates (not ARM, your basic 30-year fixed) within the near future. I’m asking because I’m shopping for a mortgage right now and it’d be nice to know if I can get a lower rate just by cooling my heels for a week or two. Teh interwebs give conflicting information.

  6. Adam291 says:

    Banks will probably lower the interest on fixed mortgages, and they’ll probably do it quickly.

    The reason why lowering the rate will help things out is because it will allow people to take out safer mortgages at rates they can afford. If the Fed was willing to drop the rate by half a percent, this is probably only the first in a series of rate cuts, depending on how the market works out.

  7. Crazytree says:

    I knew this was coming so I did two things:

    1. refi’ed a large business loan to an adjustable rate.

    2. PUT MY MONEY IN CDs TODAY BEFORE THE RATES DROP

  8. timmus says:

    With the dollar tanking, especially as the interest rate cut basically equates to firing up the presses and printing more money, it will be interesting to see how much longer foreign investors are willing to hang on to their dollar-denominated securities. If they start flocking to the Euro, Americans might as well start spending what they have left on Ramen noodles and guns.

  9. timmus says:

    Also spot price on gold, the favorite hedge against inflation, is up 3% from Sunday, with half that gain following the Fed announcement.

  10. spevman says:

    CRAZYTREE:

    Good move on the refi of that loan. But, unless you need the cash for short term purposes, why would you put it in CDs instead of the stock market which over history, has always gone up in the long run?

  11. Dont Know Me? You Are Me. says:

    Sheesh, I didn’t know that Africa is a country.

  12. wezelboy says:

    Great. By the time I can afford a house in a market fueled by cheap loans our currency will have collapsed.

  13. alk509 says:

    Aw, shit… I was still hoping that they’d do the right thing and make us suck it for a while in the interest of saving our economy in the long term. I guess at this point the question is not if our whole economy is going in the shitter, but when it will do so… Get ready to Euroize your assets, people!

    This is a sad day for America.

  14. Charles Duffy says:

    @SilverStar95:

    [...]without doing anything to increase the minimal wage earned by a typical individual[...]

    I think I missed something here. Are you suggesting that we try to fight inflation by raising the minimum wage?