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SOURCE: Federal Reserve/Rich Clabaugh–STAFF |
Fed's main task: Save the banks
Aggressive moves to cut interest rates by America's central bank are intended to stave off a financial meltdown.
By Mark Trumbull | Staff writer of The Christian Science Monitorfrom the February 1, 2008 edition
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In moving with unusual speed to cut interest rates, officials at the Federal Reserve are aiming to prevent a nationwide recession, but they're also doing something more targeted: throwing a lifeline directly to the beleaguered banking industry.
The Fed says that it isn't trying to bail out anyone. Rather, its move is grounded partly in concern that banking troubles could deepen, choking off credit to the whole economy at a precarious time.
The pace of consumer spending stalled in December, according to government data released Thursday. America's businesses are also on edge, with slow job creation causing a rise in unemployment. In response, the central bank is moving to stimulate growth. But it is also trying to forestall a possible bank meltdown that would worsen the situation.
The interest-rate cuts could give financial firms some breathing room to absorb losses tied to home loans.
"This is more about Wall Street than Main Street," says Ken Goldstein, an economist at the Conference Board, a business-sponsored research group in New York. "We've got the monetary strategy we've got because financial markets are nervous."
The Fed pointed to this anxiety, and to the risk it poses, in announcing its latest moves. "Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," the Federal Open Market Committee said in the statement accompanying the rate cut on Wednesday.
Citing "downside risks" to the economy, the statement again pointed to Wall Street, saying it "will continue to assess the effects of financial and other developments on economic prospects" in deciding future policy actions. The key point: Financial developments have an impact that extends beyond the geography of Manhattan or the paychecks of investment bankers – many of whom are going without million-dollar bonuses this year.
Deepest cuts since the '80s
Since September, the Fed has now cut its short-term interest rate, charged among banks for overnight loans, from 5.25 percent to 3 percent.
Much of that cut has happened just in recent days. On Wednesday, the Fed's policy committee voted to cut its short-term interest rate by half a percentage point, barely a week after an emergency rate cut of 0.75 percentage point.
A cut of that magnitude hasn't been seen since the 1980s, and these moves together signal a Fed now on high alert against a possible recession.
The Fed hopes that interest-rate cuts will help stimulate consumer and business spending, since lower rates make borrowing more attractive and saving less attractive.
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