Federal Reserve Board Lowers Key Interest Rate to 2.25%
Alex Carrick
Yesterday, March 18 2008, the U.S. Federal Reserve Board took bold action once again to try to deal with the problems in the financial sector. A further 75 basis-point cut (100 basis points = 1.0%) in the federal funds rate was announced. This leaves the Fed’s key policy-setting interest rate at only 2.25% and marks a decline of 300 basis points since last August.
The lower interest rate is designed to stimulate economic activity and thereby restore confidence in the financial sector. However, lower rates also perform another important function. They make loan rollovers (including end-of-term changes to adjustable rate mortgages) cheaper.
Aggressive rate cuts are just one part of the Fed’s action plan. Last week, it made $200 billion in additional credit available to top-ranked financial institutions. It also helped arrange the sale of Bear Stearns Cos. to JPMorgan Chase, thereby averting a possible collapse that would have sent shock waves around the world.
The U.S. desperately needs some good news. February housing starts remained in the doldrums at just over one million units, although it was interesting to note that multiple-unit starts, on average so far this year, are actually ahead of last year (+16%). Single-family starts remain down by about one-third.
Inflation continues to lurk in the shadows (+4.0% in February), although worries in this area are being set aside in order to deal with more immediate problems. Lower interest rates, at least in the short term (i.e., until recovery kicks in), are causing further weakness in the U.S. dollar. However, this is not really yielding the improvement in the foreign trade picture that would be hoped for.
So far, the lower U.S. dollar has meant a ratcheting up in world oil prices. Producers want to maintain their “real” returns. Therefore, through the mechanism of higher-priced energy imports, a more significant improvement in the U.S. trade deficit in goods is being foiled.
