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Bernanke Gone Wild: Another 1/2% Cut

Discussion in 'BBS Hangout: Debate & Discussion' started by weslinder, Jan 30, 2008.

  1. weslinder

    weslinder Contributing Member

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    http://www.nytimes.com/2008/01/30/business/30cnd-fed.html?hp

    Fed Cuts Rate by Half-Point; 2nd Reduction in 8 Days

    WASHINGTON — The Federal Reserve reduced short-term interest rates on Wednesday for the second time in eight days, meeting widespread expectations by investors on Wall Street for a big rate cut.

    In lowering its benchmark Federal funds rate by half a point, to 3 percent, the central bank acknowledged that it is now far more worried about an economic slowdown than rising inflation, and it left open the possibility of additional rate reductions.

    “Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” the central bank said in a statement accompanying its decision. In addition, it said, recent data indicated that the housing market is still getting worse and the job market appears to be “softening.”

    Taken together, the back-to-back rate cuts totaling 1.25 percent amounted to the Fed’s most aggressive effort in years to head off a recession. By comparison, the Fed under Alan Greenspan reduced the overnight rate by only a half-point after the terrorist attacks on Sept. 11, 2001.

    The news on Wednesday sent stocks higher on Wall Street. Within minutes after the announcement, the Dow Jones industrial average, which had been down slightly in early afternoon, was up 100 points.

    Hours before the Fed announced its decision, the Commerce Department estimated that the nation’s economic growth slowed markedly in the fourth quarter of 2007 to an annual rate of just 0.6 percent from 4.9 percent in the third quarter.

    The slowdown was sharper than the already-gloomy forecasts of most economists on Wall Street, where the consensus estimate called for fourth-quarter growth of 1.2 percent.

    The Fed’s move on Wednesday came after it electrified investors on Jan. 22 with an even bigger surprise rate cut — three-quarters of a point — at a rare unscheduled meeting.

    The Fed cut dovetailed with efforts by Congress and the White House to pass a fiscal stimulus bill that would inject at least another $160 billion into the economy this year in the form of deficit-financed tax rebates for individuals and tax breaks for businesses.

    The House passed a measure earlier this week, after reaching agreement with the Bush administration. The Senate Finance Committee began work Wednesday on a bill that would add more money for unemployment benefits, food stamps and potentially other government spending programs.

    Though House and Senate lawmakers are expected to haggle over the precise shape of the fiscal package, there is a broad political agreement between Democratic leaders in Congress, President Bush and the Federal Reserve on the need for a stimulus package of some kind.

    Taken together, the fiscal package and the Fed’s own rate reductions would amount to a one-two punch aimed at jolting the economy enough to keep it out a recession — or at least mitigate the effects of any downturn that might develop.

    Since the Fed reluctantly began reversing course in August, when credit markets abruptly froze in panic as a result of soaring default rates on subprime mortgages, the central bank has slashed the overnight federal funds rate by almost half in a total of five actions thus far.

    But policy makers faced difficult questions about how deep to cut rates, and there was widespread uncertainty about whether they would reduce them by a half-percent or by only a quarter-percent.

    On Wall Street, where the clamor about a recession remains at a fever pitch, investors had betting heavily on a bigger cut and were poised to send stock prices sharply lower if the Fed moved more cautiously.

    Even with the Commerce Department’s preliminary estimate on Wednesday of extremely slow growth in the fourth quarter of last year, the evidence of an impending recession is mixed.

    Indeed, many economists estimate that the economy may have added about 100,000 jobs in January — a big improvement from the nearly stagnant pace in December of 18,000 jobs.

    Indeed, the ADP monthly survey of job creation, released on Wednesday, estimated that the nation added 140,000 private-sector jobs in January. Though the ADP survey often clashes with the Labor Department’s monthly employment report, which is due out on Friday, the results prompted many economists to raise their estimates of job growth in January.

    The Commerce Department reported on Tuesday that orders for all durable goods — big-ticket items like commercial aircraft and auto parts — jumped 5.2 percent last month. Excluding orders for transportation goods, which are volatile from month to month, orders climbed 2.6 percent, the first increase since September.

    Ben S. Bernanke, the chairman of the Federal Reserve, and other Fed officials are already under fire from two directions. Many analysts on Wall Street complain that the central bank has moved too slowly in response to signs of a faltering economy. They point to a plunge in housing that does not seem to have hit bottom, slowing growth in retail sales and tight credit.

    But a significant minority of economists argues that policy makers have let themselves be unnecessarily alarmed by panicky swings in the stock market. If the central bank props up the economy with easy money, they warn, the result will be higher inflation in the future.

    Richard DeKaser, chief economist at National City Corporation, a Cleveland bank, is skeptical that the economy is headed for a recession, despite the common assumption that it is. “Few seem to take seriously the prospect that we are not going into a recession,” said Mr. DeKaser, who cites the latest labor market data, showing fewer weekly claims for unemployment benefits and encouraging layoff numbers, which suggest to him that the nation has added a hefty number of jobs in January.

    And despite the huge losses and write-offs stemming from subprime mortgages, he added, many business borrowers have yet to face a credit squeeze.

    Members of the central bank’s Federal Open Market Committee, which decides interest rates, have shown clear signs of disagreement among themselves.

    Fed officials acknowledged earlier this month that they had lowered their forecasts for economic growth this year, even though their previous forecast had already assumed a slowdown in the first half of this year.

    Mr. Bernanke acknowledged on Jan. 10 that the housing market was still in a free fall and that the turmoil in subprime mortgage markets had shaken the broader credit markets.

    When the Fed surprised investors by cutting its overnight rate at an unscheduled meeting on Jan. 22, officials left little doubt that they would lower the rate yet again at their regularly scheduled two-day policy meeting this Tuesday and Wednesday.

    Fed officials acknowledge that psychology and expectations are playing an important role in the financial markets. To the extent that investors remain fearful about credit risks, markets for mortgage-backed securities are likely to remain dysfunctional and banks will be forced to write down even more of their loan portfolios.

    But analysts say Mr. Bernanke faces a difficult challenge in trying to manage expectations. On the one hand, they say, the Fed wants to act decisively enough to reassure investors and the public that it will prevent the economy from sinking. On the other hand, they say, Mr. Bernanke does not want to be seen as panicking in response to a plunge in the stock market.
     
  2. hotballa

    hotballa Contributing Member

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    wow: again not an economist, but this is bad right?

    question: since the rates are even lower now than probablyt some people's subprime mortgages, are we still doing that subprime bailout thing?
     
  3. weslinder

    weslinder Contributing Member

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    If you're not an exporter, it's bad.
     
  4. lpbman

    lpbman Member

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    America for sale, half price.

    I think I'll turn off my heater and throw dollar bills in the ol smokey to keep warm.
     
  5. MadMax

    MadMax Contributing Member

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    depends on who you ask.

    this is a downturn that's affecting consumers more than corporations. the idea is to cut rates for those who are paying consumer obligations, primarily...including mortgage rates. i don't think cutting rates is nearly the bad idea that others here do.
     
  6. gifford1967

    gifford1967 Contributing Member
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    Contacted my mortage lender yesterday. We'll be refinancing at the low point in the next month.
     
  7. hotballa

    hotballa Contributing Member

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    how much lower can it go?

    anyone know whats the lowest it's ever been?
     
  8. Major

    Major Member

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    I agree. Once the economy stabilizes, there need to be measures taken to ensure there's no repeat of this mess, but it does need to be done. The consequences of not getting this on track would be horrible.

    One of the benefits of globalization is that you're less likely to have major worldwide recessions because one country is less likely to drag the whole world down. That's one of the big reasons we really haven't had a major recession since the 1970's/early 1980's. The 1991 and 2001 recessions were minor blips. But the flipside of this is that if the global economy DOES go into the tank, it would be one hell of a huge disaster and is much more likely to spiral out of control.
     
  9. Major

    Major Member

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    Fed funds rates are 3.00% now. I believe they were in the 1's several years ago.
     
  10. hotballa

    hotballa Contributing Member

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    surprisingly the dollar has actually been a bit stronger than it has been last month. i know this because i export things to UK and have a pounds account with Ebay.
     
  11. weslinder

    weslinder Contributing Member

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    That is a point. If you are trying to pay off debt, inflation is good for you, as long as the core economy (which affects wages more) stays strong.

    Even so, a strong dollar is good for the long-term health of the economy.
     
  12. MadMax

    MadMax Contributing Member

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    yeah..the markets in latin america jumped about 3% on news of the cuts...we're truly inter-connected.

    i agree 100%..you see problems like 2008 coming, you cut rates NOW instead of ticking away like Greenspan did and then making a massive cut all at once. then you correct when things get better.
     
  13. DonkeyMagic

    DonkeyMagic Contributing Member
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    i think its a bit much and unnecessary. more overreacting, imo.
     
  14. MadMax

    MadMax Contributing Member

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    funny, because it seems those playing commodity markets were expecting more than a 1/2 point cut.
     
  15. DonkeyMagic

    DonkeyMagic Contributing Member
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    no that seems really silly
     
  16. pippendagimp

    pippendagimp Member

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    Mr. Helicopter w/ another special delivery from The Red (shield) Baron ;)
     
  17. bigtexxx

    bigtexxx Contributing Member

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    not necessarily. It's a pretty common misconception....we had robust GDP growth the past several years without a strong dollar
     
  18. Invisible Fan

    Invisible Fan Contributing Member

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    Most of which was fueled by foreign investors and sovereign funds. Maintaining a weak dollar is unsustainable because the drop in value amounts to defaulting on our debt in the hundreds of billions. Eventually the incentive to pour in more money to prop up the dollar's value will fizzle once those foreign investors diversify out.

    When that happens, Americans without large assets or equities, not-rich, will feel the painful crunch, especially when their homes are tapped dry.
     
  19. lpbman

    lpbman Member

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    GDP and the economy still not the same thing.
     
  20. bigtexxx

    bigtexxx Contributing Member

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    You're right, on a looooooooong term viewpoint
     

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