Fed Cuts Rate Half Point, and Stock Markets Soar
Hiroko Masuike for The New York Times
Traders on the floor of the New York Stock Exchange Tuesday.
By
EDMUND L. ANDREWSPublished: September 19, 2007
WASHINGTON, Sept. 18 — The Federal
Reserve rolled out its most powerful interest rate weapon on Tuesday in
a bid to stop the turmoil in housing and financial markets from
bringing down the overall economy.
Skip to next paragraph RelatedFederal
Reserve StatementTimes Topics:
Mortgages
and the MarketsBen
S. BernankeMultimedia Back Story With The Times's Gretchen Morgenson (
mp3)
The New York Times
But even as stock markets
soared in a thunderous rally, the Fed carefully stopped short of
implying any commitment to reduce rates even more in the months ahead.
Indeed, policy makers cautioned that they still have lingering worries
about inflation — a concern that would weigh against stimulating the
economy further with cheaper money.In reducing its benchmark
interest rate by an unusually large one-half percentage point, to 4.75
percent from 5.25 percent, the central bank made it clear that policy
makers viewed the turbulence and disruptions of the past couple of
months as too dangerous to ignore. The reaction in stock
markets was ecstatic: the Dow Jones industrial average jumped 200
points almost instantly and ended the day up 335 points, or 2.51
percent, at 13,739.39. The move was the Fed’s first rate
reduction of any kind in four years, the steepest in nearly five years
and its most abrupt reversal of course since January 2001, when policy
makers sharply cut rates at an unscheduled emergency meeting just
before the last recession. “Shock therapy,” summed up Ethan Harris, chief United States economist at
Lehman Brothers.For
consumers, the Fed’s move could mean lower borrowing costs for
mortgages and automobile loans. But the impact may be muted, because
investors remain deeply anxious about the credit quality of mortgages
and other long-term loans. The main problem in the last month has not
been high rates so much as the availability of capital to complete
deals.Analysts described the Fed’s action as a bold attempt to
restore confidence with a quieter caveat that investors and consumers
should not assume the certainty of more painkillers later this year.“The
important policy debate now centers on the future interest rate path,
but Fed officials left that more ambiguous,” said Richard Berner, chief
United States economist at
Morgan Stanley.Indeed,
while many on Wall Street have been clamoring for an aggressive rate
cut, some economists had warned against it, saying that it might send
the wrong signal by bailing out those who contributed to the housing
bubble and encourage future market excesses.In both the bold
stroke and the fine print, the Fed’s move offered a revealing hint
about Ben. S. Bernanke, the former professor from Princeton who took
over as Fed chairman last year. Mr. Bernanke, a champion of
steady rules to guide monetary policy, has long been seen as more
skeptical about reacting to financial turbulence than his predecessor,
Alan Greenspan. Mr.
Bernanke, for example, made it clear that he did not want to rescue
investors or real estate speculators who made bad decisions. But in
shielding the economy from a downturn, the Fed will inevitably be
helping some of the very people Mr. Bernanke did not want to help.
What seems to have driven Mr. Bernanke to act more boldly, analysts
said, was the jolt from the Labor Department’s unexpectedly poor
employment report for August, which showed that the nation had lost
jobs for the first time in four years.Still, Mr. Bernanke’s move
was nothing if not a Greenspanian display of “discretionary” policy in
response to trouble but before the signs of an economic downturn were
unambigious. And in doing so, he obtained unanimous agreement from
other board members, even though some Fed officials have been dubious
about the need for a rescue.The Fed’s course change has been
under way since early August, when fears about huge losses on subprime
mortgage loans and continued downturn in housing caused a much broader
panic in credit markets. The resulting credit crunch has now
affected all but the safest home mortgages, and also greatly reduced
the ability of private equity funds and hedge funds to borrow money at
low rates. Many banks, which had been planning to resell their loans
into the giant market for tradable commercial debt securities, are now
being forced to absorb loans that the securities markets will no longer
take. In the rate cut and an accompanying statement, the
central bank acknowledged that the risks of a recession were too big to
ignore.“The tightening of credit conditions has the potential to
intensify the housing correction and restrain economic growth more
generally,” the Fed’s policy-making committee said in its statement.
“Today’s action is intended to forestall some of the adverse effects on
the broader economy that might otherwise arise from the disruptions in
financial markets.”