Fed cut Federal Funds Rate by half a percentage point

At its scheduled meeting on Wednesday, Federal Reserve (Fed) cut the Federal Funds rate by 0.5% to 3 percent. 8 days ago, Fed convened an emergency meeting and at that time cut the rate by a hefty 0.75% point.

 

In all, the Fed funds rate had been cut by 1.25% for this month. This is unprecedented and the major concern now of Fed was to prevent the US economy from going into recession instead of the previous stance of fighting inflation.

 

The stock markets had anticipated this cut coming from Fed and this has been factored into the stock markets before the announcement.

 

The Dow Jones Industrial Average dropped 0.3% to 12,442 points at the close of Wednesday trading indicating that the aggressive Fed funds rate cuts will not in the immediate term be going to arrest the fall in the US economy.

 

The US economy has to fall first for a while before picking up later. How long the period of bottoming out is anybody’s guess.

 

The consumers in US must feel confident with the US economy before they are willing to spend again. Since the US economy is driven more by domestic demands instead of export-oriented part of the economy, the world hopes that the Fed rate cuts together with the proposed US$150 billion fiscal stimulus package can sway US consumers to spend again.

 

My sense is that the US property bust and the financial institutions’ sub-prime mortgage problems will take a year to sort out before the corporate earnings can pick up again. Slower economic growth in the US is a definite but the risk of outright recession is still debatable.

 

Written on 1/31/2008 8:50 AM

 

Copyright © 2008, the author known as LKT in Singapore.

 

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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