Fed slices rates by a half-point
Fed Chairman Ben Bernanke and his colleagues lowered their target for short-term interest rates, which influences a wide variety of borrowing costs, to 4.75 percent. The decrease was the first cut from the Fed in more than four years and followed 15 months of steady rates from the central bank.
The Fed had not moved rates by half a percentage point since November 2002, opting instead for more gradual, quarter-percentage point moves since June 2003, when the Fed last cut interest rates. The U.S. central bank moved in quarter-point moves each of the 17 times it raised rates from June 2004 to June 2006.
A cut from the Fed should "help alleviate some of the tensions in financial markets and provide a boost to consumers and homeowners currently feeling the pressure of relatively tight lending conditions," Ruesch International said in a note to clients Tuesday morning.
What it means:
- Banks are expected to immediately cut the prime rate to 7.75 percent from 8.25 percent. The prime rate is the rate to which a number of consumer loans, such as home equity lines of credit and credit cards, are tied.
- Rates on adjustable-rate mortgages may fall, although many are based on other interest rates. The Fed has even less control over fixed-rate mortgage rates, which are tied to 10-year Treasury yields, which have fallen in recent weeks as investors have flocked to the safer investment vehicles. The average rate for a 30-year, fixed-rate mortgage was 6.31 percent last week, down from 6.46 percent in the previous week and 6.43 percent a year ago, according to Freddie Mac.
An interest rate cut from the Fed had been widely expected by economists and investors for weeks after the meltdown in the subprime mortgage market led to turmoil in financial markets around the globe.
To try to calm the markets, the Fed on Aug. 17 cut its discount rate, what it charges banks to borrow from Federal Reserve banks directly, a half-point to 5.75 percent, indicating its willingness to make money available.
Investors and analysts were divided on how big a cut to expect today from the Fed. Those arguing for the larger, half-percentage point cut, such as Joel Naroff of Naroff Economic Advisors, argued the problems on Wall Street were spreading to Main Street, posing a risk that the economy will sag and requiring a bolder move from Bernanke and his colleagues.
The number of jobs in the USA fell for the first time in four years in August while surveys of consumer and business confidence have declined. The housing market continues to slide. And the increase in oil prices to record levels in recent weeks could lead to higher energy tabs for consumers and businesses, forcing them to cut spending in other parts of the economy.
Still, data continue to point to healthy retail sales, manufacturing activity and exports, leading to a mixed picture of the U.S. economy.
Fed policymakers had continued to express concern about inflation until recent weeks, but good news on the inflation front came Tuesday morning, giving the Fed greater latitude to cut interest rates.
The Labor Department said its producer price index, a measure of wholesale inflation, fell 1.4 percent in August, the sharpest decline in 10 months. The drop was led by a sharp fall in energy costs.
But even excluding volatile food and energy prices, wholesale prices over the past 12 months were up 2.2 percent in August versus 2.3 percent in July.
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