Tuesday, January 22, 2008

The Fed Seems Very Worried

The Fed cut interest rates this morning before the market opened by 75 bps. Seems to me like the Fed is very worried. Text in bold is my emphasis. From Yahoo News:

The U.S. Federal Reserve on Tuesday slashed U.S. interest rates by a hefty three-quarters of a percentage point, the biggest rate cut in more than 23 years, in an emergency bid to lend support to a U.S. economy some fear is on the verge of recession.

The action by the rate-setting Federal Open Market Committee took the key federal funds rate, which governs overnight lending between banks, down to 3.5 percent, its lowest level since September 2005. The Fed also lowered the discount rate it charges on direct loans to banks to 4 percent.

"It is obviously a surprise but it seems the markets could not wait for the promised rate cut at the end of the month and neither could the Fed given the behavior of the markets over the last few days," said Kevin Logan, economist at Dresdner Kleinwort Wasserstein in New York.

It was the largest single shift in interest rates since November 1994, when the Fed raised rates by three-quarters of a point, and it was the first rate cut in between regularly scheduled policy meetings since September 17, 2001, the first day U.S. financial markets reopened after the September 11 terror attacks.

The last time there was a rate cut of at least three-quarters of a point was in October 1984. . . .

. . . . Fed policy-makers are scheduled to meet on January 29-30 and, in the wake of the central bank's bold rate cut on Tuesday, financial markets were expecting the Fed to again lower borrowing costs by at least a quarter of a point.

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