Federal Reserve Lowers Interest Rates To One Percent
The Federal Reserve announced it was cutting interest rates today, lowering the federal funds rate to 1% and the discount rate to 1.25%. The move comes as an effort to jump start a credit market that has been reeling since the collapse of the investment banking sector.
In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.
Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.
This quickly follows on the heels of a coordinated rate cut move by global central banks earlier in the month. The Fed had pretty much frozen rates at 2% in the spring when inflation worries were much higher.
With the price of oil having lost over half it’s value since July, their assessment that a decline in global demand would ease price stability concerns was essentially correct. Now that stagflation issues have dissipated somewhat, the Fed has moved decisively this month, initiating a number of monetary policy moves as well as recommending additional fiscal spending in a second stimulus package to promote consumer spending.
It is even possible we could see rates fall even further in the upcoming months and not just in this country. The sharp drop in global economic activity has raised concern is some circles of deflation risk.
Statements released this year from FOMC meetings in the early 2000’s showed that the Fed was prepared to lower rates to as low as 0% if it deflation risk increased. Whether or not that will become necessary this time around remains to be seen.
