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Fed Drops Interest Rate Three-Quarters of a Point...

Announcing that they were taking the extraordinary action of changing rates between their periodic Federal Open Market Committee meetings, The Fed early this morning dropped the Federal Funds rate by 75 basis points, or three-quarters of a point.

The size of the rate drop was significant, since a reduction of that magnitude had not taken place since 1990... eighteen years ago.

The last time the Federal Reserve Board announced a rate cut between their regularly scheduled meetings was in 2001... reflecting the severity of the market conditions which greatly contributed to the cut.

Taking the extremely unusual step, Ben Bernanke, Chairman of the Federal Reserve Board, held an emergency video conference overnight, and announced the rate change approximately thirty minutes before the New York Stock Exchange opened for business this morning.

The primary reason Bernanke gave for the change was an attempt to head off the growing concern that the weakness in the US economy was quickly translating into a downward spiral in foreign stockmarkets world-wide.

Many economists also thought there appeared to be a good chance that during the regularly scheduled FOMC meeting at the end of January... that further rate cuts may be announced.

In addition to cutting the Federal Funds rate, Bernanke also announced that the Fed was cutting its discount rate as well.  Many commercial banks throughout the US responded by making an equal reduction of 75 basis points in their "prime rate."

It remains unclear whether Bernanke's action in convening his overnight video conference was due to both the near panic in the overseas markets, and the intense criticism he and the Fed have come under for their apparent failure to respond more quickly to both US and world conditions.

Comment balloon 6 commentsKaren Anne Stone • January 22 2008 08:38PM

Comments

It was a wild ride to watch the markets today. All of this could have been avoided had rates been dropped SOONER.  I mean if Bernanke truly wanted to be DRAMATIC, he could have just let the entire world economy crash.  We came frighteningly close to that scenario though. 
Posted by Ruthmarie Hicks (Keller Williams NY Realty - 120 Bloomingdale Road #101, White Plains NY 10605) over 10 years ago
Hi Ruthmarie:  I think your comment is pretty close to the truth.  He surely should have done it earlier, although at least with him doing it now, and then the world watching their markets recover somewhat... it does show how tied together their markets are to ours.  I would hope this reaction would bring some folks in other countries to really recognize just how dependent we all are on each other.  But... it could have been done some much better. 
Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 10 years ago

Karen,

This is news to me. Thank-you for sharing. I am headed to the bank today to refinance one of my houses.

Posted by Mike Frazier, Northwest Tennessee Realtor (Carousel Realty of Dyer County) over 10 years ago
Hi Mike:  You are very welcome.  I have always prided myself on my home mortgage knowledge.  I find it hard to believe that many Realtors simply leave everything concerning mortgages to their lender to keep track of.  Knowledge is Queen !  Thanks for your comment.
Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 10 years ago

Karen:

Your dad sounds great. I lost my dad pretty young as well. I was 33 and he was only 57. I enjoyed reading and it brough back some great memories. Be blessed and have a great weekend.

Posted by Alan Kirkpatrick, Alan in Austin (Austin Texas Homes) over 10 years ago

The fact the drop happened during a major stock market down turn was not the primary cause for the target rate decrase.  Late the week before credit demand began to absolutely collapse (which probably was also the primary trigger the stock collapse)  To defend the former target would have required the FED to drain very significant amounts of liquidity (loans) from the system, which would have shell shocked the banks.  

Basically the FED sets a target rate which they defend by either adding or removing liquidity from the system (short term loans).  When if becomes difficult to defend the current target either because it requires adding or subtracting to much liquidity from the banking system the rate is changed.  Yes, it's kinda backwards from what the media likes to spew, but the FED follows the credit markets not leads them.   

Posted by Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) over 10 years ago

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