The Federal Reserve decided Wednesday to cut a key interest rate by an additional half percentage point to 3.0% in order to prevent the economy from slipping into recession. Gold prices soars, crude futures advance as Fed cuts rate.
The Wednesday action, the fourth straight move since Sept. 18 last year, came eight days after the central bank had lowered the federal funds rate, which commercial banks charge each other on overnight loans, by 0.75 percentage point to 3.5%. The 0.75-percentage-point cut was the biggest rate reduction since October 1984. The key interest rate has been cut by a combined 2.25 percentage points in the four actions. The Federal Reserve decision on Wednesday had been expected by Wall Street. In the minutes just after the Fed decision, the Dow Jones industrial average jumped 76.33, or 0.61%, to 12,556.63, after rising 273 over Monday and Tuesday. “Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” the Fed explained in a statement announcing the decision. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets, it said.
In a related action, the Fed approved a half percentage point decrease in the discount rate, the interest rate that the Fed charges to make direct loans to banks, to 3.50%. “Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity,” the Fed said. However, “downside risks to growth remain,” it noted. And it expected inflation to moderate in coming quarters.
The Fed will continue to assess the effects of financial and other developments on economic prospects and will “act in a timely manner as needed” to address those risks, it said. The latest rate cut followed news that the US economic growth had slowed to an annual pace of just 0.6% in the final quarter of last year, down significantly from a 4.9% rate in the prior three months. The barely discernible quarterly growth came amid increased concern about a possible recession. As a result of the Wednesday decision, commercial banks’ prime lending rate, the benchmark for millions of consumer and business loans, will drop by a corresponding amount to 6.0%, the lowest point since the spring of 2005. The prime rate responds to changes in the federal funds rate. By lowering interest rates, the Fed hopes that consumers and businesses are encouraged to boost their spending and investment, helping bolster the economic growth.
Gold prices soared Wednesday after the Federal Reserve cut its key interest rate by a half percentage point. Following the Fed decision, gold for April delivery surged $10.10 to $940.90 an ounce in after-market trading on the New York Mercantile Exchange. Gold futures earlier settled at $926.30 an ounce as investors waited to see if the central bank would cut by half a point. Also weighing on investors Wednesday was a report by the Commerce Department showing the economy slowed more than expected in late 2007. The Energy Department’s Energy Information Administration said crude and gasoline stocks rose by 3.6 million barrels each during the week ended Jan. 25, and gasoline inventories to rise by 1.9 million barrels. Meanwhile, a 315,000 barrel per day Canadian oil sands field has been temporarily shut down due to freezing temperatures. Canada is the single largest supplier of crude oil to the US. Light, sweet crude for March delivery rose 69 cents to settle at $92.33 a barrel on the New York Stock Exchange. (people.com.cn)