Smart Borrower Blog

Federal Reserve Makes Historic Rate Cut Decision


Dec 18th, 2008 @ 8:46 AM by Amber Nelson


The Federal Reserve made an unprecedented move Tuesday by resetting its target interest rate to a range of zero to 0.25 percent, down from 1.0 percent, citing continued weakness in the U.S. markets as the impetus for the dramatic decision.

“Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined,” said the Federal Open Market Committee in a statement. “Financial markets remain quite strained and credit conditions tight.  Overall, the outlook for economic activity has weakened further.”

The Fed has consistently lowered its rate from 5.25 percent in 2006 in an attempt to provide greater liquidity and lending incentive as the economy has suffered, first from housing and mortgage market woes, and then from Wall Street crises. The U.S. in now in a situation that some call the worst economic state since the Great Depression.

The Fed also made its decision in light of the fact that “inflationary pressures have diminished appreciably” giving the Committee the freedom to lower the federal funds rate to historic lows. It expects the inflation to continue to moderate in coming quarters.

In coming months, the Fed pledged itself to supporting the financial markets and stimulating the economy, which will include buying up mortgage-backed securities and agency debt.

“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Committee promised. “In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

News of the interest rate move led U.S. stocks to rally with the Dow Jones industrial reaching 359 points by the day’s close, although the Fed change caused the dollar to fall to two and a half month low again the euro.

About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.

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