Fed cuts interest rates 75 basis points

January 22, 2008 12:35 pm

Ben Bernanke and the Fed have acted swiftly to slash the overnight lending rate by 75 basis points. This is a very smart move given the global panic that has occured on the stock markets.This rate cut combined with the stimulus package will be very positive in terms of both market sentiment and actual performance of the economy in the months to come.Markets may still display shortages of liquidity as the sub prime mess unwinds but further rate cuts are available and also a major infrastructure program could and should be undertaken. The cut is still being absorbed by the American markets as they digest the news at mid day the markets are down but not by nearly as much as they would have been had the Fed not acted.
The Bank of Canada for its part also cut its rate but only by a disappointing 25 basis points. The gap between the two rates now has widened and the Canadian dollar rose again to over 97 cents.The Canadian markets were also up substantially at mid day as the combination of the two cuts in interest rates was regarded very favourably .

4:45 pm The markets have now closed. The TSE was up over 500 points recovering most of the ground it lost on Monday the Dow Jones and S&P 500 were both down but by a much smaller amount than had been feared as a measure of confidence for the time of being was rertored to the market by the Fed's action.the DJ fell by 128 points and the S&P 500 by 14 points or 1 %. Clearly there is still a pessimistic mood but this may well shift over the coming days.

The Federal Reserve statement is reproduced below courtesy of the Federal Reserve. The Bank of Canada,s statement will follows.




Release Date: January 22, 2008

For immediate release
The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth.   While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.   Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain.   The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh.   Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.

In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent.   In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis.



The Bank of Canada's press release reproduced courtesy of the Bank of Canada.


Press Releases     2008FOR IMMEDIATE RELEASE
22 January 2008 CONTACT: Jeremy Harrison
613 782-8782  

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Bank of Canada lowers overnight rate target by 1/4 percentage point to 4 per cent
OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 4 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 4 1/4 per cent.

In the second half of 2007, the Canadian economy grew broadly in line with the Bank's expectations in the October Monetary Policy Report (MPR). Despite some slowing in growth in the fourth quarter, the Canadian economy continues to operate above its production capacity. Both core and total CPI inflation have been lower than projected in the MPR, largely reflecting a price-level adjustment related to increased competitive pressures in the retail sector stemming from the level of the Canadian dollar.

Financial market conditions have deteriorated since October, leading to a tightening of credit conditions in industrial countries. Given this, and a deeper, more prolonged decline in the U.S. residential housing sector, the 2008 outlook for the U.S. economy is now significantly weaker than at the time of the October MPR.

For Canada, the effects of the weaker U.S. economic outlook will lead to additional downward pressure on export growth. However, despite tighter credit conditions, domestic demand in Canada is projected to remain strong. This strength is supported by continued income growth associated with the increase in commodity prices since October, which has led to further gains in our terms of trade. Overall, the Bank now projects weaker growth in 2008 than was expected in October, with the economy moving into modest excess supply in the second quarter of this year. Somewhat stronger growth in 2009 brings the Canadian economy back into balance in early 2010. The inflation projection has also been revised down since October, especially for 2008, primarily reflecting the price-level adjustment noted above and the recent one-percentage-point cut in the GST. Both core and total CPI inflation should fall below 1 1/2 per cent by the middle of this year before returning to the 2 per cent target by the end of 2009. On the whole, the Bank judges that the risks to this inflation projection are roughly balanced.

In line with this outlook, the Bank has decided to lower the target for the overnight rate and further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to return inflation to target over the medium term.

The Bank's detailed projection for the economy and inflation, and risks to the projection, will be published in the Monetary Policy Report Update on 24 January 2008.

Information note:

The Bank of Canada's next scheduled date for announcing the overnight rate target is 4 March 2008.
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