Fed cuts interest rate 3/4 of a point

The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, slashed a key interest rate by three-quarters of a percentage point on Tuesday [22 Jan 2008] and indicated further rate cuts were likely. The surprise reduction in the federal funds rate from 4.25% to 3.5% marked the biggest one-day rate move by the central bank since it cuts its discount rate by a full percentage point in December 1991, a period when the country was struggling to get out of a recession.

In a brief statement, the Fed said it had decided to cut the federal funds rate "in view of a weakening of the economic outlook and increasing downside risks to growth." The move caught financial markets by surprise. Many had expected the central bank would wait until its meeting next week to make any move in interest rates. The Fed made the move before markets had opened in the United States, hoping that the bold move would limit the decline in U.S. stocks.

Wall Street plunged at the opening of trading Tuesday after an interest rate cut by the Federal Reserve failed to assuage investors fearing a recession in the United States. The Fed's decision to cut its federal funds rate to 3.50 percent and the discount rate came a week before the central bank's regularly scheduled meeting. But there were already fears in the markets before the Fed move that an interest rate cut wouldn't be enough to prevent a recession. It was the first time the Fed altered the target federal funds rate between scheduled meetings since the markets reopened after the Sept. 11, 2001 terrorist attacks.

- That was quite the emergency rate cut. The markets didn't seem too convinced but at least it reduced the potential impact of the drop as the Dow futures were down over 600 points earlier in the day, and there was talk that the Dow could have dropped a 1000 points or more if the Fed had done nothing and waited until the meeting next week.

- Update : Now that the American markets have closed, we have a clear winner. It's not the Dow (down 128 points), it's not the S&P 500 (down 14), and it's not the Nasdaq (down 47). The winner is the Canadian TSX, which is up 508 points. Easy money is inflationary, inflation benefits commodities, and Canada happens to have lots of commodity-related stocks. Gold jumped an awesome $40 up from its $850 support level to go over $890, and similarly, oil recovered $4 from its $85 support level to $89.

Comments:

I noted in your "see also" the "Stocks plunge, 2007 gains wiped out" headline. It's a bit worse than just "2007 gains" being wiped out.

President Bush took office on Saturday, January 20, 2001. It's now been 7 years. Compare the closing prices of the previous Friday evening with current prices:

Dow 30 Industrials: $10,587.59, now about $12,000.
S&P 500 (broader market): $1342.54, now about $1300.
Nasdaq (techs and small): $2770.38, now about $2300.

But that's in US dollars. Let's reformulate to some other major industrial currencies.

Dow 30: £7227, now about £6120
S&P 500: £916, now about £665
Nasdaq: £1891, now about £1170

Dow 30: €11295, now about €8210
S&P 500: €1432, now about €890
Nasdaq: €2055, now about €1575

Dow 30: ¥1238K, now about ¥1280K
S&P 500: ¥157K, now about ¥140K
Nasdaq: ¥324K, now about ¥245K

Posted by Doug on January 23, 2008 at 02:14 AM SGT #

will sg follow this 3/4 rate cut? hyperinflation will eat up all our savings... who will benefit from this?

Posted by ling on January 23, 2008 at 06:07 AM SGT #