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