As expected, the Federal Reserve cut the federal funds target rate by a quarter-percentage point to 4.5 percent on Wednesday. The decision by the central bank's Federal Open Market Committee comes 43 days after the rate was slashed by half a percentage point. The committee also cut its discount rate, by a quarter-percentage point, to 5 percent. According to the committee, after these latest actions, the risk of inflation equals that of a recession.
Although the committee says economic growth was strong in the third quarter, "the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction." In a statement, the committee said the latest cut, coupled with September's slashing "should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time."
The Fed's latest action met the approval of the National Association of Home Builders (NAHB). CEO Jerry Howard told BUILDER Online that the NAHB was "thrilled" by the rate cut.
"The Fed has acknowledged the need to try and stabilize the housing sector and the overall credit sectors, and we think it should go a long way in boosting consumer confidence," Howard said. "The Fed's actions in the last 40 days are laying a foundation for a housing recovery next year."
Pennsylvania-based Toll Brothers also applauded the Fed's efforts, hoping it provides the housing sector with a much needed boost.
"The Fed has not lost sight of the need to have policies that will create confidence in the financial markets, and any step that positively affects consumer confidence is positive for housing," said Joel Rassman, CFO at Toll Brothers.
David Weekley, chairman of David Weekley Homes, agreed. "I'm excited that the Federal Reserve has recognized that the economy is slowing. I think the cut is appropriate."
"Right now, the customers believe that housing prices have not troughed, "said Rassman. "Once the customers believe that prices have stabilized ... we'll see a turnaround," he said.
Brian Bethune, an economist for Global Insight, a Massachusetts-based economic and financial analysis firm, sees the Fed's recent actions as a precursor to another 25-basis-point cut in early 2008. More importantly, Bethune says, is that mortgage rates, especially adjustable rates, will come down.
"It will definitely provide a cushion," Bethune told BUILDER Online. "With the rates down 75-basis-points cumulatively, I think it's a better prognosis overall for the housing industry."
"It is not going to necessarily stop the downward momentum, but it will definitely provide a cushion," Bethune said.
One committee member, Kansas City Federal Reserve Bank President Thomas M. Hoenig, voted against the cut. Hoenig's dissention, according to Wachovia Securities economist John Silvia, may signal future resistance from other committee members. When the committee meets again in December, Silvia says there is a 50/50 chance for another cut.
"It's really a toss up," Silvia added.
As expected, the committee isn't making any promises on future cuts. According to a press release, it will "continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."
Silvia is also predicting that within days, borrowing rates will lower. He adds that the cut is "a good signal to builders that they will see more credit available to everybody."
News of the cut bolstered Wall Street Wednesday as stocks rallied in reaction to the news.
BUILDER Online attempted to contact a number of home builders but all declined to comment on the rate cut at press time.
Steve Zurier contributed to this report.