The Federal Reserve cut two key interest rates by half a point, seeking 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% to 4.75%. The half-point reduction was double the quarter-point move that many economists had been expecting.
Ben Bernanke
J. Scott Applewhite / AP
Ben Bernanke
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 already had cut the discount rate on Aug. 17 as it scrambled to respond to the growing credit crisis.
Stocks immediately rallied on the moves, which were more aggressive than many investors had expected.
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 the venerable Alan Greenspan in February 2006.
Tightening Credit
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."
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 statement outlining its decision.
The central bank said that it still believed the economy faced some risk of inflation, but said that financial market developments since its last meeting in early August had increased the uncertainty surrounding the economic outlook.
"The committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth," it said.
The decision comes as evidence accumulates that a prolonged U.S. housing market downturn and a wild financial market ride over the summer has taken a toll on broader economic activity.
A decline in employment in August, the first drop in four years, appeared to confirm that housing-related strains were weighing on businesses and impacting households.
In addition, reports on retail sales and industrial output in August also showed some softness.
Change in August
At its last regularly scheduled meeting on August 7, the U.S. central bank had said its predominant concern was inflation, even as it noted tighter credit and financial market volatility.
Within days of the Fed's August 7 meeting, financial markets unraveled as French bank BNP Paribas froze three funds with U.S. subprime mortgage market exposure. The Fed on August 10 said it would pump cash into the banking system as necessary to keep markets functioning normally.
Even so, stock markets tumbled the following week, at one point plumbing declines of more than 10 percent below 52-week highs before rebounding.
The U.S. central bank then stepped in on August 17 with a surprise cut to the discount rate and an explicit acknowledgment that risks to growth had "increased appreciably."
Admiral Valdemar wrote:I'm wondering does anyone comprehend the concept of there being too much cash in the system.
Hush you, the markets are rallying and going up, creating countless billions in wealth for everyone!
Why do we value gold and not blades of grass?
Because gold is shiny and we can make wedding rings out of it?
On a more serious note, despite the rise in oil & gasoline futures prices in recent weeks, their actual value has pretty much stagnated thanks to the plummeting USD. I'm not amused by this trend.
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I'm not sure why people choose 'To Love is to Bury' as their wedding song...It's about a murder-suicide
- Margo Timmins
When it becomes serious, you have to lie
- Jean-Claude Juncker
On a more serious note, despite the rise in oil & gasoline futures prices in recent weeks, their actual value has pretty much stagnated thanks to the plummeting USD. I'm not amused by this trend.
Sounds rather disturbing, but I havn't been keeping up there, gotta get the parentals to renew some subscriptions to things.
All this news makes me sad I take my money in bucks and not euros. But I'm thinking converting just a few hundred bucks around isn't that smart.
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Ace Pace wrote:All this news makes me sad I take my money in bucks and not euros. But I'm thinking converting just a few hundred bucks around isn't that smart.
Let's put it this way. At the beginning of this year, $300 USD would convert to roughly $350-$360 Canadian dollars. As of now, it'll work out to maybe $305 CAD. That's 50 bucks in 9 months and I doubt we've seen the end of this trend.
aerius: I'll vote for you if you sleep with me. Lusankya: Deal!
Say, do you want it to be a threesome with your wife? Or a foursome with your wife and sister-in-law? I'm up for either.
What the fuck is wrong with the Fed? I'm no expert here (though I will be, you can be sure of that), but what I do know of economics says that now is the time to go with a tight cash policy not to loosen things more. Shit, wasn't everyone just saying that low interest rates started the whole mess in the first place? Do they think the problem was they weren't low enough?
If anyone's interested, the inflation adjusted value record for a barrel of light sweet is around $96 to 106. The buying power of the dollar free-falling is going to hurt us in Europe, but it will destroy you (to paraphrase President Palmer).
The cost has only gone up something like 4% for those in the EU, while the US is looking at a 14% increase over the last year. In fact, it can be argued the US is being outbid for oil because of the dollar losing value and no one wanting to use them unless necessary.
Ace Pace wrote:All this news makes me sad I take my money in bucks and not euros. But I'm thinking converting just a few hundred bucks around isn't that smart.
Let's put it this way. At the beginning of this year, $300 USD would convert to roughly $350-$360 Canadian dollars. As of now, it'll work out to maybe $305 CAD. That's 50 bucks in 9 months and I doubt we've seen the end of this trend.
Well, at least my relatives in Venezuela will like the news. Dollars are pretty dammed expensive, especially if you have to resort to buying them in the "grey" market.
It can be actually cheaper now to buy something like a laptop if I take a direct flight to NY from Munich, spend there a couple of nights and bring it back with me. If the conversion ever reaches the psychological barrier of 1.5, I'll get myself a big bag and do it.
Colonel Olrik wrote:It can be actually cheaper now to buy something like a laptop if I take a direct flight to NY from Munich, spend there a couple of nights and bring it back with me. If the conversion ever reaches the psychological barrier of 1.5, I'll get myself a big bag and do it.
The better half and I have been mulling if there is anything new we need to buy while the dollar is low. Unfortunately, most of the stuff we would want (e.g. a flat screen TV) would be cumbersome to take on a plane and difficult to smuggle past customs authorities.
While this is a good trend for me in the short term, it's not one I want to see continue in the long term.
Spin Echo wrote:
The better half and I have been mulling if there is anything new we need to buy while the dollar is low. Unfortunately, most of the stuff we would want (e.g. a flat screen TV) would be cumbersome to take on a plane and difficult to smuggle past customs authorities.
But, officer, I swear, I always take my giant flat screen TV with me on vacations
Things too obviously cumbersome are out, but there are lots of expensive gadgetry that is worth it - and as long as it comes out of the box nobody cares. I'm happy that I have several good friends here that are American and go back to the US often. It's how I've been getting DVD's lately and right now I'm deciding how much I need a new Ipod.. If I go to the US personally and the rates are like this or better I'll be very tempted to bring back a new bike. And a laptop.
Spin Echo wrote:The better half and I have been mulling if there is anything new we need to buy while the dollar is low. Unfortunately, most of the stuff we would want (e.g. a flat screen TV) would be cumbersome to take on a plane and difficult to smuggle past customs authorities.
Personally, I'm mail-ordering some XTR mountain bike parts when the Canadian dollar hits parity. Not that I really need them, but it's nice to have a backup stock in case I break something. I should probably pick up a Chris King headset for my fiancée's bike while I'm at it, lasts forever with a bit of care, the last one I'll likely ever need to buy.
aerius: I'll vote for you if you sleep with me. Lusankya: Deal!
Say, do you want it to be a threesome with your wife? Or a foursome with your wife and sister-in-law? I'm up for either.
Colonel Olrik wrote:If I go to the US personally and the rates are like this or better I'll be very tempted to bring back a new bike. And a laptop.
Yup, I'm definitely in the market for a new bike in the next year or two, with the way the USD is dropping I'll probably go full titanium XTR everything.
aerius: I'll vote for you if you sleep with me. Lusankya: Deal!
Say, do you want it to be a threesome with your wife? Or a foursome with your wife and sister-in-law? I'm up for either.
aerius wrote:Personally, I'm mail-ordering some XTR mountain bike parts when the Canadian dollar hits parity. Not that I really need them, but it's nice to have a backup stock in case I break something. I should probably pick up a Chris King headset for my fiancée's bike while I'm at it, lasts forever with a bit of care, the last one I'll likely ever need to buy.
I think it will be time to get a new wardrobe when I visit my parents next. I'm trying to minimize the amount of stuff I'll need to take back with me from New Zealand, so I've been trying to put off buying new clothing. A lot of my clothing is really starting to look tatty these days. Fortunately, no one is going to think anything suspicious of someone bringing back a suitcase full of clothing from vacation.
Well for now this benefits me in the shirt run with my constant visits to my wife in Ohio. The currency rate for the canadian dollar is $0.987015 USD. Just a little bit more and we reach parity! Hell, this puts me in a better position with my purchasing power.
ASVS('97)/SDN('03)
"Whilst human alchemists refer to the combustion triangle, some of their orcish counterparts see it as more of a hexagon: heat, fuel, air, laughter, screaming, fun." Dawn of the Dragons
Oh, good. I wasn't the only one thinking "Why does it sound like people are getting excited about shopping trips instead of freaking out about how much of a disaster this all will probably turn up being?"
"To make an apple pie from scratch you must first invent the universe."
— Carl Sagan
Why should America care? Brad Pitt wants more kids, isn't THAT what counts?!?!
"A person is smart. People are dumb, panicky, dangerous animals and you know it. Fifteen hundred years ago everybody knew the Earth was the center of the universe. Five hundred years ago, everybody knew the Earth was flat, and fifteen minutes ago, you knew that humans were alone on this planet. Imagine what you'll know...tomorrow."
-Agent Kay
Erik von Nein wrote:Oh, good. I wasn't the only one thinking "Why does it sound like people are getting excited about shopping trips instead of freaking out about how much of a disaster this all will probably turn up being?"
Ok, that's enough of that doom & gloom thinking, I for one, will celebrate this wonderful opportunity to buy & own some quality US made goods, like ummm...ummm...I'll get back to you when I can think of something which is still made in the USA.
Actually I'm quite certain we all know what a charlie foxtrot this situation has the potential to become, and how likely it is to head in that direction. I think we're just doing a bit of gloating and dark-humoured laughing at America's expense.
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The slight variations in spelling and grammar enhance its individual character and beauty and in no way are to be considered flaws or defects
I'm not sure why people choose 'To Love is to Bury' as their wedding song...It's about a murder-suicide
- Margo Timmins
When it becomes serious, you have to lie
- Jean-Claude Juncker
Unless, Mike, Bernanke and his minions like Bush and Cheney and the rest of the happy-go-lucky gang believe they can manifest freedom as a physical substance and sell it off for a grand a key, no.
No, they're just fucked. So who's going to draw the short straw and let them know that debts have to be paid eventually?
The funny thing about the American debt situation is that if it was just the federal government debt, the country could manage that. As a percentage of GDP, it's actually not that bad (yet). But the country's economy has become a house of cards, built upon a mountain of individual debt, underwritten with empty promises and sunny optimism.
"It's not evil for God to do it. Or for someone to do it at God's command."- Jonathan Boyd on baby-killing
"you guys are fascinated with the use of those "rules of logic" to the extent that you don't really want to discussus anything."- GC
"I do not believe Russian Roulette is a stupid act" - Embracer of Darkness
"Viagra commercials appear to save lives" - tharkûn on US health care.
