The Federal Reserve this week cut interest rates for the third time this autumn as the United States central bank sought to prevent the rapidly deteriorating housing market from dragging the world’s biggest economy into recession.
Fearful of inflationary pressures from rising oil prices and a falling dollar, the Fed limited itself to a quarter-point cut. Share prices fell sharply in the wake of the Fed’s cutting its Fed funds and the discount rate by a quarter point. The Federal funds rate has been cut by a full percentage point since September, but some dealers had hoped for another half-point reduction as an insurance policy against the threat of next year’s presidential race taking place in a stagnant economy. The discount rate — the rate at which commercial banks can borrow from the Fed — was cut to 4,75%, although some on Wall Street had been expecting a half-point reduction to end the crisis in credit markets.
One member of the Open Market Committee, Eric Rosengren, voted for a half-point cut in the Fed funds rate, but the other nine members took a cautious view. The Fed said in a statement that it would “continue to monitor inflation developments closely”. The latest data suggested that growth was slowing, “reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. [This week’s] action, combined with the policy actions taken earlier, should help promote moderate growth over time.”
It added that core inflation had picked up modestly this year, “but elevated energy and commodity prices, among other factors, may put upward pressure on inflation”.
Providing no clue on future rate decisions, the Fed admitted that “recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation”.
John Lonski, chief economist at Moody’s investors service in New York, said: “I think there’s going to be some disappointment that the cut was only 25 basis points given the fact that we did have a widening of credit risk premia and a widening of the spread between Libor and T-bills leading up to this meeting.
“By cutting by only 25 basis points, the Fed effectively conveys its sense that recession risks are not as great as what market participants believe. In other words, the Fed sees recession risk as being less than 40% whereas the market sees recession risk as at least 40%.”
Economic worries are prompting US companies to cut back on Christmas cheer.
Only 85% of companies are throwing a festive party for their staff this year, compared with 94% a year ago. The figure is the lowest since 2001, according to a study by New York headhunting firm Battalia Winston.
Exposure to sub-prime mortgages caused a quarterly loss of $502-million at H&R Block, the US’s largest tax-preparation firm. The Kansas-based company is in the process of shutting down its home loans arm, Option One.
The White House’s efforts to bail out victims of the mortgage crisis has divided the US. A slim majority polled by CNN, only 51%, agreed that those at risk of losing their homes should receive “special treatment”. — Â