The Federal Reserve today sliced the federal funds rate by one-half percent, or 50 basis points, pushing the federal funds rate to 1 percent.
The federal funds rate is the interests banks pay to borrow money from each other for short periods of time.
Today’s decision, while anticipated, did break with tradition; the Fed is typically unwilling to adjust interest rates prior to a presidential election for fear of appearing to benefit one party or another. But the current economic situation in the United States and countries around the world left few other options for the Federal Open Market Committee (FOMC), which already ordered an emergency rate cut earlier in October.
“The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures,” the FOMC said today in its statement announcing the unanimous decision to reduce interest rates. “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.”
The Fed continues to assert that the current credit crunch should soon loosen. “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.”
Alison Rice is senior editor, online, at BUILDER magazine.