Drastic Emergency Federal Rate Cut

A video conference between officials of the Federal Reserve led by chairman Ben Bernanke mid-December of ’08 led to a record-breaking reduction of federal funds rate. At a drop of 4.25 to 3.5 percent, it was the biggest reduction on loan interest yet in two decades.

The huge Fed rate cut that was approved by a vote of 8-1 was a move to do something about the global financial crisis and to prevent extensive damage to local and worldwide stock markets. “The world’s stock markets are in meltdown so the Fed came in with an inter-meeting move to try to stop the panic,” analyzes Christopher Rupkey who is senior economist at Bank of Tokyo-Mitsubishi. Another analyst, Lyle Gramley of the Stanford Financial Group says “This move by the Fed was essential,” adding “Bernanke promised in a speech earlier this month to take substantive action in a timely and decisive manner.”

This extreme action which unexpectedly came about in between regularly-scheduled Fed meetings reflects how crucial things are financially. U.S. real estate prices are still falling, unemployment rising and consumer spending weakens even more as the effects of the recent stimulus program wear-off. The emergency cut is expected to lower credit card interest rates, mortgage rates, and bank loans.

Investor speculation in response to this big move by the Federal Reserve officials however may have caused a drop in stock prices in Wall Street. It apparently created further alarm and worry that the economy is worse-off. “This is a whole lot of new information for people to digest,” senior investment strategist David Waddell who is also chief executive of Waddell & Associates said in a recent news report. “Now we need time to sit back … and figure out what it all means.”

Federal Reserve officials don’t plan to stop with this action however- more rate cuts are in the works to ensure lasting economic damage control. Some experts say rate cuts alone won’t “cut it” however. More have to be done to trigger improved consumer spending and boost the ailing economy. According to a chief U.S. economist at Deutsche Bank, Joseph LaVorgna, “It’s a tall order to get (people) to go out and spend again,” adding. “That’s why you also need a stimulus.”

Advisers under the incoming President are expecting a trillion-dollar economic recovery plan under Obama’s term over the next two years.