Published September 18, 2007
The Federal Reserve on Tuesday slashed benchmark interest rates by a half-percentage point in a bold bid to buffer the economy from a housing slump and related financial market turbulence.
The unanimous decision by the central bank's Federal Open Market Committee took the overnight federal funds rate down to 4.75 percent, its lowest level since May of last year. The Fed also lowered the discount rate it charges for direct loans to banks by a half-point to 5.25 percent.
It was the first cut in the interbank federal funds rate -- the Fed's main tool to influence the economy -- since June 2003 and the first half-point cut since November 2002.
Financial markets had widely expected the Fed to lower overnight borrowing costs, but were split over whether the move would be a quarter-point or more-aggressive half-point.
Prices for stocks and government bonds rose, while the dollar fell, on the rate move. The blue chip Dow Jones industrial average was up more than 190 points, or nearly 1.5 percent, within minutes of the Fed's decision.
"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.
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."
Further seeking to sooth markets, Fed Chairman Ben Bernanke addressed the turmoil directly in a speech on August 31. His comments that the Fed stood ready not only to provide liquidity but to limit adverse impacts to the economy seemed to seal the prospect of a cut to the more-important federal funds rate.
Watch “Your World” today at 4:00 p.m. EST to see former Federal Reserve Chairman Alan Greenspan’s reaction to today’s announcement.