Emergency Rate Cut

Posted on January 22, 2008
Filed Under Business, Economy News, World |

The Federal Reserve cut U.S. interest rates by three quarters of a percent. That is the federal funds rate or the interest rate that banks charge each other on overnight loans. The new rate is 3.5% down from 4.25%. This is the first emergency rate cut by the Fed since September 11, 2001.

International markets over the last two days experienced huge sell offs driven by fear of a financial crisis in the United States. The Federal Reserve explained that short term funding has let up but as they said :

“broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.”

This action was taken a week before the Fed’s regular meeting. The Fed believes this move will be a confidence builder, and hopes that it will be perceived that the powers in the United States Economy will do what it takes to get the economy under control. But what if the opposite is the result? What if the financial markets perceive that the Fed’s fear has driven the move? Will it increase the velocity of the downfall?