FOMC lowers interest rates by 0.75% to 2.25%
18 March 2008
The US Federal Reserve elected to cut its Fed Funds rate by 0.75% to 2.25% at yesterdays meeting after the latest deterioration in US financial markets. The Fed have now cut overnight interest rates from 5.25% to 2.25% since September as a rise in defaults on sub-prime mortgages has escalated into a financial crisis. The Fed also ordered a parallel 0.75% cut in its discount rate on emergency lending, lowering this to 2.5% following the 0.25% cut on Sunday.
The housing sector, labour market conditions and financial markets have all deteriorated sharply since the Fed’s last meeting in January. Above all, the extreme dysfunction within the financial markets has been so severe that the fifth biggest US investment bank, Bear Stearns, ran out of liquidity and was bought by JP Morgan Chase this week at a cut down price, in a rescue deal engineered by the Fed.
Fears that a seizing up of US financial markets could plunge the US economy into deep recession appear to have overtaken concerns of inflation, fuelled by higher oil and commodity prices. However, the Fed’s statement was notable for focussing back on the inflation situation, suggesting that they were running out of room for further large cuts.
The initial reaction to last night’s developments was for US stocks to power higher and for the Dollar to recover marginally.