Back to Ozzie & Harriet short-term interest rates
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The Federal Reserve did as expected today, cutting its key short-term interest rate to 1% from 1.5%, citing a ‘markedly’ slower economy and the ‘intensification of financial market turmoil.’ It was the second half-point cut in three weeks.
At 1%, the Fed’s target for the federal funds rate, the overnight loan rate between banks, has returned to where it was from June 2003 to June 2004, under former Chairman Alan Greenspan. The central bank at that point was trying to stave off what it feared could be price deflation -- a concern that has revived in spades in recent months, as the global economy reels and asset prices (homes, stocks) dive.
Before 2003, the Fed’s rate hadn’t been at 1% since the days of Ozzie and Harriet, in the late 1950s. Consumer loan rates, such as for mortgages, are well above the rates of that era, however.
Banks today began cutting their prime lending rates to 4% from 4.5% in tandem with the Fed’s move, which will lower loan costs for many consumers and businesses. As for savers, see this recent post for advice on dealing with falling savings yields.
Here is the text of the Fed’s statement:
The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1%. The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. 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. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.