Fed cuts key interest rate in bid to fend off recession

WASHINGTON — The Federal Reserve cut a key interest rate for the first time in four years, seeking with an aggressive half-point move to prevent a steep housing slump and turbulent financial markets from triggering a recession.

The Fed announced Tuesday that it was reducing its target for the federal funds rate, the interest that banks charge each other, from 5.25 percent to 4.75 percent. The half-point reduction was double the quarter-point move that many economists had been expecting.

The action was designed to boost economic growth by lowering borrowing costs for millions of consumers and businesses. Commercial banks were expected to quickly match the Fed’s action by cutting their prime lending rate. The prime rate has been at 8.25 percent for the past 15 months.

The Fed’s action came in the midst of the worst slump in housing in 16 years. That downturn has triggered record defaults in subprime mortgages and roiled financial markets around the globe as investors have become worried about where the spreading credit problems will next appear.

The financial market turmoil represents the first major test for Fed Chairman Ben Bernanke, who took over from Alan Greenspan in February 2006.

In addition to cutting the federal funds rate by a half point, the central bank also reduced its discount rate, the interest it charges in making direct loans to banks, by a half-point as well.

The Fed had also cut the discount rate on Aug. 17 as it scrambled to respond to the growing credit crisis.

In explaining its action Tuesday, the Fed said that “the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.”

Many analysts had predicted that Bernanke, who has been cautious since taking over as Fed chairman, would opt for a quarter-point move, the change in rates usually preferred by Greenspan.

But with this action, Bernanke appeared to be trying to surprise financial markets with a positive change after disappointing investors following the Aug. 7 meeting when he and fellow board members refused to change rates and still said inflation was the biggest threat facing the economy.

“Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time,” the Fed said in a brief statement explaining its actions.

Analysts said rate cuts were certainly needed, given spreading weakness in housing, financial market turbulence and a bad August employment report which showed the labor market lost jobs for the first time in four years.

“We have a very soft economy and if the Fed doesn’t lower rates then the economy could fall into a recession,” said Mark Zandi, chief economist at Economy.com.

Zandi said he had trimmed his forecast to show economic growth of around 2.5 percent in the current quarter, down sharply from 4 percent growth rate in the April-June quarter. He said the fourth quarter is likely to be even weaker — at around 1.5 percent.

Analysts believe the Fed has room to cut rates because inflation pressures have been easing. In good news on that front, the Labor Department reported Tuesday that wholesale prices fell by 1.4 percent in August. It was the biggest drop in 10 months and much larger than the 0.3 percent fall that had been expected.

Economists said they believed that Bernanke, who wrote extensively as an economics professor on the Great Depression that followed the 1929 stock market crash, understands what needs to be done to avert downturns.

“We have had a long history of financial panics and if we have learned anything, it is that you shove money at them,” said David Wyss, chief economist at Standard &Poor’s in New York.

While some have complained that Bernanke has been more tentative than Greenspan would have been, no less an authority than Greenspan disagrees.

Doing a round of interviews to promote his new book, Greenspan, who was Fed chairman for 18&189; years, said Bernanke was “doing an excellent job” and he doubted that he would have done anything differently.

Greenspan told The Associated Press on Monday that the odds of a recession have grown since earlier this year, even though “the economy is not doing badly at this stage.”

He put the odds of a recession at greater than one in three. “But best I can judge it is less than 50 percent,” he said.

Greenspan’s one-in-three prediction earlier this year rocked Wall Street.

Talk to us

More in Herald Business Journal

Members of Gravitics' team and U.S. Rep. Rick Larsen stand in front of a mockup of a space module interior on Thursday, August 17, 2023 at Gravitics' Marysville facility. Left to right: Mark Tiner, government affairs representative; Jiral Shah, business development; U.S. Rep. Rick Larsen; Mike DeRosa, marketing; Scott Macklin, lead engineer. (Gravitics.)
Marysville startup prepares for space — the financial frontier

Gravitics is building space station module prototypes to one day house space travelers and researchers.

Orca Mobility designer Mike Lowell, left, and CEO Bill Messing at their office on Wednesday, Aug. 16, 2023 in Granite Falls, Washington. (Olivia Vanni / The Herald)
Could a Granite Falls startup’s three-wheeler revolutionize delivery?

Orca Mobility’s battery-powered, three-wheel truck is built on a motorcycle frame. Now, they aim to make it self-driving.

Catherine Robinweiler leads the class during a lab session at Edmonds College on April 29, 2021. (Kevin Clark / The Herald)
Grant aids apprenticeship program in Mukilteo and elsewhere

A $5.6 million U.S. Department of Labor grant will boost apprenticeships for special education teachers and nurses.

Peoples Bank is placing piggy banks with $30 around Washington starting Aug. 1.
(Peoples Bank)
Peoples Bank grant program seeks proposals from nonprofits

Peoples Bank offers up to $35,000 in Impact Grants aimed at helping communities. Applications due Sept. 15.

Workers build the first all-electric commuter plane, the Eviation Alice, at Eviation's plant on Wednesday, Sept. 8, 2021 in Arlington, Washington.  (Andy Bronson / The Herald)
Arlington’s Eviation selects Seattle firm to configure production plane

TLG Aerospace chosen to configure Eviation Aircraft’s all-electric commuter plane for mass production.

Jim Simpson leans on Blue Ray III, one of his designs, in his shop on Friday, August 25, 2023, in Clinton, Washington. (Ryan Berry / The Herald)
Whidbey Island master mechanic building dream car from “Speed Racer”

Jim Simpson, 68, of Clinton, is using his knowledge of sports cars to assemble his own Mach Five.

An Amazon worker transfers and organizes items at the new PAE2 Amazon Fulfillment Center on Thursday, Sept. 14, 2023, in Arlington, Washington. (Ryan Berry / The Herald)
Amazon cuts ribbon on colossal $355M fulfillment center in Arlington

At 2.8 million square feet, the facility is the largest of its kind in Washington. It can hold 40 million “units” of inventory.

A computer rendering of the North Creek Commerce Center industrial park in development at 18712 Bothell-Everett Highway. (Kidder Mathews)
Developer breaks ground on new Bothell industrial park

The North Creek Commerce Center on Bothell Everett Highway will provide warehouse and office space in three buildings.

Dan Bates / The Herald
Funko president, Brian Mariotti is excited about the growth that has led his company to need a 62,000 square foot facility in Lynnwood.
Photo Taken: 102312
Former Funko CEO resigns from the Everett company

Brian Mariotti resigned Sept. 1, six weeks after announcing he was taking a six-month sabbatical from the company.

Cash is used for a purchase at Molly Moon's Ice Cream in Edmonds, Washington on Wednesday, Aug. 30, 2023. (Annie Barker / The Herald)
Paper or plastic? Snohomish County may require businesses to take cash

County Council member Nate Nehring proposed an ordinance to ban cashless sales under $200. He hopes cities will follow suit.

A crowd begins to form before a large reception for the opening of Fisherman Jack’s at the Port of Everett on Wednesday, August 30, 2023, in Everett, Washington. (Ryan Berry / The Herald)
Seafood with a view: Fisherman Jack’s opens at Port of Everett

“The port is booming!” The new restaurant is the first to open on “restaurant row” at the port’s Waterfront Place.

Tanner Mock begins unwrapping new furniture that has been delivered on Thursday, Aug. 24, 2023 in Everett, Washington. (Olivia Vanni / The Herald)
In Everett, new look, new name for mainstay Behar’s Furniture

Conlin’s Furniture, based in South Dakota, bought the huge store and celebrates with a grand opening this week.