Federal Reserve Cuts Rates 50 bps in Co-ordinated Central Bank Action

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The Federal Reserve was among six major world central banks that delivered an inter-meeting 50 basis point cut to its overnight lending rate. The Fed cut its key rate 50 bps to 1.50%, citing weakening economic activity and a reduction in inflationary pressures.

"Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit," the Federal Open Market Committee said in a statement. "Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation."

The FOMC said it will monitor economic and financial developments "carefully" and will "act as needed to promote sustainable economic growth and price stability."

The action was part of a co-ordinated move by world central banks, including the Bank of Canada, the Bank of England, European Central Bank, Swiss National Bank, Chinese central bank and Sveriges Riksbank, among others.

The Board of Governors also unanimously approved a 50 basis point decrease in the discount rate to 1.75%, a request submitted by the Board of Directors of the Federal Reserve Bank of Boston.

At its last monetary policy meeting on Sept. 16, the FOMC decided to hold the Fed funds target rate at 2.00% and, in an accompanying statement, said it will act as needed to promote growth.

Equity markets short up, but quickly retreated on the news, with Dow futures going from 9400 to 9797 before falling back down to 9620, and S&P 500 futures picking up 43 points to 1043 before falling back to 1020 in the twenty minutes following the announcement. The Eurostoxx went from 2420 to 2512 and retracted to 2454, and the FTSE 100 rose from 4477 to 4654 before falling to 4563, in the 25 or so minutes following the releases.

By Stephen Huebl and edited by Sarah Sussman
©CEP News Ltd. 2008