[R-G] Fed Moves Again, Cutting Key Rate by Half a Point

[Yoshie Furuhashi]

<http://www.nytimes.com/2008/01/31/business/31econ.html>
January 31, 2008
Fed Moves Again, Cutting Key Rate by Half a Point
By EDMUND L. ANDREWS and DAVID M. HERSZENHORN

WASHINGTON — The Federal Reserve cut short-term interest rates on
Wednesday for the second time in eight days, meeting Wall Street hopes
for cheaper money. At the same time, the Senate continued work on a
$161 billion plan to prop up Main Street with tax rebates and
temporary tax cuts.

In lowering its benchmark federal funds rate by half a percentage
point, to 3 percent, the central bank signaled that it was ready to
err on the side of boldness in fending off a possible recession. It
also left open the possibility of additional rate cuts in the months
ahead.

The Fed's move was part of a one-two punch by Washington aimed at
jolting the economy with easier credit and extra money. Senate
Democrats advanced a fiscal stimulus bill that could inject $161
billion into the economy this year through tax rebates for individuals
and tax breaks for businesses.

If anyone needed more evidence that the economy is stumbling, it came
just hours before the Fed announced its decision. The Commerce
Department reported that the economy went into a stall in the last
quarter of 2007, estimating that growth slowed to an annual rate of
0.6 percent, from 4.9 percent in the third quarter.

Despite some disagreement, all of the major power centers in
Washington — the White House, Congress and the Federal Reserve — are
in broad agreement about the need to bolster the economy with both
fiscal and monetary policy.

The Senate Finance Committee passed a stimulus package on Wednesday
that was more expensive than one the House passed on Tuesday, but only
three Republicans on the panel voted for it, in a signal that
bipartisan cooperation may be faltering.

President Bush, in a speech at the Robinson Helicopter Company in Los
Angeles, repeated his call for the Senate to move fast. "I understand
people having their points of view, and of course, we welcome points
of view in Washington," Mr. Bush said. "There appears to be a lot of
them up there."

The big rate cut initially prompted a rally in stock prices, with the
Dow Jones industrial average jumping more than 100 points immediately
after the Fed announcement. But the relief was quickly overshadowed by
anxiety about another wave of potential losses tied to subprime
mortgage defaults.

The major stock indexes ended the day slightly below where they had
started after reports that credit-rating agencies were poised to lower
their ratings on several companies that insure bonds containing
packages of mortgages. The ratings moves would very likely reduce the
value of billions of dollars' worth of these so-called mortgage-backed
securities.

Many economists are far from convinced that even a combination of tax
rebates and cheaper money would prevent a recession. And in a sign
that bond investors are fretting that the moves could lead to higher
inflation, yields on 10-year and 30-year Treasury bonds edged up
slightly on Wednesday.

But both Congress and the Fed were under heavy pressure to provide
reassurance to their respective constituencies.

"Financial markets remain under considerable stress, and credit has
tightened further for some businesses and households," Fed officials
said in a statement accompanying their rate decision. Noting that
"downside risks remain," the Fed said it would "act in a timely manner
as needed to address those risks."

The Fed's action was its second big rate reduction in eight days and
its fifth rate cut since September. All told, the central bank has
reduced overnight lending rates by 1.25 percentage points since
Tuesday of last week and by 2.25 percentage points since August.

By comparison, under its former chairman, Alan Greenspan, the Fed
reduced the overnight rate by only a half-percentage point after the
terrorist attacks on Sept. 11, 2001, though it eventually pushed its
benchmark rate as low as 1 percent in 2003 to encourage an economic
recovery.

The Fed's move on Wednesday came after it electrified investors on
Jan. 22 with an even bigger surprise rate cut of three-quarters of a
percentage point at a rare unscheduled meeting.

Among investors, the big uncertainty was whether Ben S. Bernanke, the
Fed chairman, would persuade his colleagues to cut rates by one-half
percentage point or just one-quarter.

Investors were betting heavily that the Fed would choose the bolder of
the two choices, and many analysts predicted that investors would
pummel stock prices if the Fed disappointed them.

But Fed officials were already under fire from two directions at once
— from investors and analysts on Wall Street who complained that the
Fed had responded too timidly to signs of a downturn, and from a small
but significant number of economists who complained that policy makers
were being pushed by the stock market into rash decisions.

The decision by the Fed's policy-making committee provoked one
dissenting vote by Richard W. Fisher, president of the Federal Reserve
Bank of Dallas, who favored no change in interest rates, but other
well-known skeptics about rate reductions voted in favor.

"The message came through loud and clear that they are embracing the
need for an accommodative monetary policy," said Robert V. DiClemente,
an economist at Citigroup. "This is Volckeresque in terms of the
leadership it signified," Mr. DiClemente added, alluding to Paul A.
Volcker, the former Fed chairman who pushed up interest rates to
double-digit levels in the late 1970s and early 1980s to stifle
inflation.

But while many analysts praised Mr. Bernanke and the Fed for their
decisiveness, some said the Fed had become unpredictable and might end
up acting capriciously.

While it is clear that economic growth has slowed sharply, the
evidence of a looming recession is still ambiguous. Housing
construction and home sales have both plunged by more than half over
the past 12 months, and home prices are declining in most parts of the
country. Over all, the housing market shows no sign yet of having hit
bottom.

Retail sales were sluggish during the crucial holiday season, but the
government estimated on Wednesday that consumer spending climbed at a
modest but respectable pace of about 2 percent during the fourth
quarter of 2007.

Job creation slowed to a crawl in December, according to the Labor
Department's preliminary estimate. But many analysts now predict that
the Labor Department, which reports on Friday about January
employment, will estimate that the nation added about 100,000 jobs
this month, up sharply from an estimated 18,000 new jobs in December.

Inflation, meanwhile, is running higher than Fed officials would like.
In its report on Wednesday about economic growth in the fourth
quarter, the Commerce Department estimated that consumer prices,
excluding energy and food, climbed at an annual pace of 2.7 percent.
The Fed's unofficial comfort zone for inflation is between 1 and 2
percent.

Ethan Harris, an economist with Lehman Brothers, said Mr. Bernanke had
moved into uncharted territory by putting so much emphasis on reducing
the risk of a downturn before one actually materialized.

"I don't have a huge objection to the Fed aggressively pushing down
interest rates, but it does seem a little erratic for the Fed to be
flip-flopping from worrying about inflation to cutting rates like
this," Mr. Harris said.

In Washington, Congressional leaders were focused on how they could
add to what the Fed was already doing.

The stimulus bill approved by the Senate Finance Committee Wednesday
would cost $157 billion in 2008 and $193 billion over two years,
roughly $32 billion more than the bill the House passed on Tuesday.

But at the very least, the effort by Senate Democrats to advance their
own plan would create some delay in getting a bill to the White House
for the president's signature, because it would require Senate and
House leaders to reconcile different plans.

Both the House and Senate proposals offer tax rebates and business
incentives to encourage spending. The Senate package would provide tax
rebates of up to $500 for individuals and $1,000 for couples, to be
phased out for incomes over $150,000 and $300,000, respectively.


--
Yoshie
<http://montages.blogspot.com/>