The Federal Open Market Committee cut its target for the Federal Funds rate 50-basis-points to 3 percent Wednesday, the second substantial cut to the funds rate in a week.
The move follows the FOMC's Jan. 22 announcement cutting the Fed Funds target rate by 75-basis-points to 3.5 percent.
Also Wednesday, the Federal Reserve Board of Governors approved a 50-basis-point cut in the discount rate, lowering it to 3.5 percent. The discount rate is the rate banks are charged to borrow from their local Federal Reserve Bank. The Fed Funds target rate is roughly the rate at which banks borrow from each other.
"The Fed continues to be worried more about the economy than about inflation," says Christian Weller, Senior Fellow at the Center for American Progress.
In its statement announcing Wednesday's rate cuts, the Federal Reserve Board says as much, noting that the FOMC expects inflation to moderate in coming quarters.
"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," the Fed said. "Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets."
While the Fed hopes that Wednesday's rate cuts, together with last week's rate cuts and several previous rate cuts in 2007, will promote moderate growth, it admits that further tweaks to lending rates may be necessary.
"Downside risks to growth remain," the Fed said. "The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."
Cutting lending rates has translated into lower interest rates, Weller says, and could help ease stress in the mortgage market. However, there are a number of problems impacting the credit crisis: interest rate resets, declining borrower incomes, lower house values, and waning confidence from lenders, Weller says. Cutting interest rates can only impact resets, he says.
"There is hope that, if enough people borrow more money, there will be a boost to employment and thus to incomes, but this is an indirect proposition and a long-term one, too," Weller says.
GDP Growth Slows
Also Wednesday, the Bureau of Economic Analysis released its advance report showing GDP growth slowing to 0.6 percent for the fourth quarter of 2007. GDP growth increased 4.9 percent in the third quarter of 2007. But the country's economic growth was sluggish in the first quarter of 2007, when it also registered just 0.6 percent growth. However GDP growth rebounded to 3.8 percent in the second quarter before peaking for the year in the third quarter.
BEA, which estimates inflation-adjusted GDP grew at 2.2 percent for the year, down from 2.9 percent growth in 2006, will release more comprehensive data on 2007 GDP on February 28, it said in a statement.
Mark Vitner, senior economist for Wachovia, says that the decline in GDP growth can be attributed to declining inventories, with businesses buying fewer goods in a weaker market.
"The volatility in quarterly real GDP is almost entirely due to swings in inventories and international trade," Vitner says. "Final domestic demand growth is much more stable."
Vitner suggests that domestic demand growth (real GDP minus inventories and international trade) is 1.4 percent, a "reasonably strong" number, he says.
GDP growth was positive in the fourth quarter thanks to personal consumption expenditures, nonresidential construction, state and local government spending, exports, and equipment and software sales, BEA said in a statement. However, residential construction and private investment were major drags on the economy, it added.
"The deceleration in real GDP growth in the fourth quarter primarily reflected a downturn in inventory investment and decelerations in exports, in PCE, and in federal government spending that were partly offset by a deceleration in imports and acceleration in state and local government spending," BEA said.