Feds may take breather after seven rate cuts

Thursday, May 1, 2008 at 1:03am

Federal Reserve officials are betting that seven interest-rate cuts and emergency loans to banks may be just about enough to pull the economy through the biggest financial crisis since the Great Depression.

The Fed’s Open Market Committee lowered its benchmark rate by a quarter point to 2 percent yesterday, extending the most aggressive easing in two decades. At the same time, the Fed backed away from previous language signaling a preference for further cuts and described reductions to date as “substantial.”

Chairman Ben S. Bernanke is navigating between a faltering economic expansion and near-record oil and commodity prices that threaten to stoke inflation. The central bank didn’t rule out further reductions, and it may take additional actions aimed at easing financial-market turmoil, such as expanding the size of cash-loan auctions for commercial banks.

“There’s no urgency,” said David Resler, chief economist at Nomura Securities International in New York. “It’s pretty clear that they believe they’ve done a lot, and it’s going to take some time for the full effects of their easing to work their way through and into the economy.”

Hours before the Fed decision, the Commerce Department reported that gross domestic product increased at an annual pace of 0.6 percent last quarter. Only an increase in inventories prevented the economy from contracting.

In March, the Fed began lending to Wall Street securities firms at the discount rate, now at 2.25 percent. It rescued Bear Stearns Cos. from bankruptcy in the first extension of credit to non-banks since the 1930s. The Fed also began auctioning up to $200 billion in loans of Treasury securities.

Treasury Secretary Henry Paulson, in an interview with Bloomberg Television yesterday, said the credit crisis probably is more than half over.

“They have been quite successful” in easing the financial crisis, said William Ford, a former president of the Atlanta Fed who is now chairman of the finance department at Middle Tennessee State University. “There is no reason they couldn’t continue to provide liquidity without lowering the fed funds rate,” he added.

Yesterday’s decision brings the Fed’s cumulative reductions in the federal funds rate to 3.25 percentage points in seven cuts since September. In 2001, the central bank lowered the rate 11 times for a total of 4.75 points.

Bernanke’s predecessor, Alan Greenspan, has come under criticism from some economists this year for inflating the housing bubble by leaving rates too low for too long. Such concern may be keeping Bernanke, 54, a former Princeton University economics professor, from pushing them down further.

“The flak the Greenspan Fed got for going to 1 percent and staying there is going to keep Bernanke from going below 2,” former Dallas Fed president Robert McTeer said in an interview with Bloomberg Television.

The economy has been the hobbled by the worst housing recession in a quarter century, and it shows little sign of abating. Investment in residential construction projects fell at an annual rate of 27 percent, the most since 1981.

At the same time, Fed officials reiterated their concern about rising prices, saying that “uncertainty about the inflation outlook remains high.” They repeated language from the March 18 statement that policy-makers expect inflation to slow, “reflecting a projected leveling-out of energy and other commodity prices.”

Crude oil futures fell this week after touching a record $119.93 a barrel on April 28. Prices are up 57 percent since Aug. 7, the last time the FOMC left interest rates unchanged at a meeting.

— Bloomberg News

Filed under: City Business
By: Blanketnazi2 on 12/31/69 at 6:00

well, vandy. something we can both agree upon! btw, online banks such as HSBC offer 3.05% interest on savings account - much better than a brick and morter bank.

By: frank brown on 12/31/69 at 6:00

It looks like Vandy1975 is showing the value of a Vanderbilt education. Bernanke and his Wall Street cronies are not fooling everyone as to who benefits from his actions. It was the people that he is helping that got the financial markets in an uproar to begin with...I bet a Maplewood dropout could figure out that you cannot lend money to the "unlendable"