The Federal Open Market Committee today lowered its target for the federal funds rate 75 basis points to 3.5 percent — the steepest cut since 1984 — in an attempt to prevent a market meltdown and recession.
The Fed took this action between its regularly scheduled monetary policy meetings. It’s the first time it has cut rates between such meetings since just after the Sept. 11, 2001, terrorist attacks.
The federal funds rate is the rate banks charge each other for overnight loans, and it impacts how much consumers pay on credit card debt, auto loans and home equity lines of credit.
According to the Fed’s statement, “while strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.”
The Committee said it expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully, as “appreciable downside risks to growth remain.”
Analysts expect the Fed to cut the federal funds rate again at its regularly scheduled meeting Jan. 29-30 by another 50 basis points, to 3 percent.
In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent. The discount rate is what the Federal Reserve charges banks for short-term loans.
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