An intensification of the housing correction and increased strains in financial markets prompted the Federal Reserve to lower key short-term interest rates today, the third consecutive meeting since September it has taken such steps.

The Federal Reserve’s Open Market Committee lowered its target rate for the federal funds rate by 25 basis points, to 4.25 percent. In a related action, the Fed’s board of governors approved a 25 -basis-point decrease in the discount rate, to 4.75 percent.

“Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending,” the committee said in a statement explaining the decision. “Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.” 

On Sept. 18, similar concerns prompted the Fed to shave 50 basis points off the federal funds and discount rates. When the Fed governors met next, on Oct. 31, they made smaller, 25 basis point reductions in both rates — the same action taken today.

One member of the committee, Eric Rosengren — the president of the Federal Reserve Bank of Boston – today argued in favor of lowering the target for the federal funds rate by 50 basis points.

The federal funds rate is the rate banks charge each other for overnight loans. The Fed can influence the rate be easing or constricting the supply of money. The discount rate is what the Federal Reserve charges banks for short-term loans.

In slashing short-term rates at its last three meetings, the Fed is gradually reversing increases to the federal funds rate made during 17 consecutive meetings between 2004 and 2006. Those increases, instituted to cool the pace of economic growth, left the federal funds rate at 5.25 percent.

Lowering short-term interest rates stimulates economic growth by encouraging borrowing, but increases the risk of inflation and can devalue the dollar in relation to other currencies.

After the Fed cut its target for the federal funds rate to 4.5 percent in October, Federal Reserve Governor Randall Kroszner said the committee appeared to have found a balance that would allow moderate economic growth while keeping the risk of inflation in check (see Inman News story).

But in a speech at the end of November, Federal Reserve Chairman Ben Bernanke warned that renewed turbulence in financial markets had “partially reversed” improvements in September and October. Bernanke promised that the Fed would remain “alert and flexible” in making monetary policy decisions, leaving the door open for today’s rate cuts.


What’s your opinion? Send your Letter to the Editor to

Show Comments Hide Comments


Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Thank you for subscribing to Morning Headlines.
Back to top
Only 3 days left to register for Inman Connect Las Vegas before prices go up! Don't miss the premier event for real estate pros.Register Now ×
Limited Time Offer: Get 1 year of Inman Select for $199SUBSCRIBE×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription