Wednesday, October 27, 2010

Fed cuts rates further 50 basis points

January 30, 2008 4:15 pm

The Federal Reserve this afternoon   has very sensibly cut its federal funds and discount   lending rate by a further 50 basis points in order to help reverse recessionary forces in the United States. This is a welcome move in the light of the latest data on economic growth which showed that the US economy grew by only 0.6 % in the last quarter of 2007. The stock markets initially reacted favourably and the Canadian dollar climbed to above parity with the US dollar.
The gap between Canada and the US in interest rates is now a full percentage point and unless the Bank of Canada moves soon to cut its rates the Canadian dollar will strengthen further putting more pressure on Canada's beleaguered export industries which are heavily dependent upon American markets. The Euro also rose against the US dollar. The real rate of interest at the central bank is now about 1/2 % point or less which coupled with the American deficit of about 3 % to the GDP once the stimulus package is approved and signed into law should be effective .Of course retail interest rates are much higher particularly on credit cards and other consumer debt. The government ought to promote consumer awareness and excercise moral suasion to influence creditors to reduce their rates accordingly.

The Canadian central bank , the Bank of Canada is likely to announce a rate cut soon rather than wait until March 6, its next regular meeting to lower its rate. If it doesn't do this simply to stubbornly assert its independence of the Fed national pride will cost Ontario and Québec workers much needed jobs in the manufacturing sector.

The FOMC statement follows below courtesy of the Federal Reserve


For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households.   Moreover, recent 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.

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity.   However, 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; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.   Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 percent.   In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco.

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