The Federal Reserve has cut a key short-term interest rate for the second time in a row.
The central bank's rate-setting committee lowered the target for the federal funds rate by one-quarter of a percentage point, to 4.5 percent. The prime rate will fall to 7.5 percent. Consumer interest rates based on the prime rate -- mainly home equity lines of credit and most variable-rate credit cards -- will fall a quarter-point in coming weeks.
Fed chops rates
The Federal Reserve shaved a quarter point off a key short-term rate.
Normally, you would expect yields on certificates of deposit to fall, too -- especially shorter-term CDs. But that's not necessarily the case this time. It's not a sure thing that mortgage rates will fall, either.
Most economists and investors had expected this rate cut because they believed the Fed would want to address the bursting of the real-estate bubble in many of the country's biggest metro areas.
The Fed explained its action by saying that economic growth was solid from July through September, but "the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction."
The rate-setting committee cautioned that "some inflation risks remain" because of rising energy and commodity prices, and that the risks of inflation and an economic slowdown are roughly in balance.
In September, the last time the
rate-setting Federal Open Market Committee, or
FOMC, met, the panel cut the federal funds rate
by half a percentage point. That was the first
time in more than four years that the Fed had
made a rate move, in either direction, of more
than a quarter of a percentage point.
"A quarter-point cut would be done in the spirit of insurance, rather than a firm belief that it's necessary," said Richard DeKaser, chief economist for National City Corp., before the Fed's announcement. DeKaser had put himself in what he called "the ultraminority camp" of economists who expected the central bank to keep rates unchanged.
DeKaser said he believes that problems in housing markets are transitory, and that he isn't convinced that the Fed should try to solve them, because it then might create other troubles. The central bank, he said, "also has to worry about inflation, and it's not out of the woods on that front."
For other observers, the issue was the Fed's credibility. The markets had priced in a near-certainty that the central bank would reduce the federal funds rate by a quarter of a percentage point. Any other move would have scared investors.
"I think that a quarter percent (cut) is baked in the cake, pretty much, and I think they're doing the right thing," Bill Hummer, chief economist for Chicago-based Wayne Hummer Investments, said before the Fed announcement. "They have to reinforce confidence, which is still fragile in some sectors of the economy."