Interest Rates Reduced for Third Time

December 12, 2007

(Long Island, N.Y.) The Federal Reserve reduced the interest rate by a quarter-point yesterday, the third time since September. This brings the federal funds rate to 4.25% from 4.5%. The rate is down a full percentage point since global credit markets shook confidence in the world’s financial system in August. But many investors clearly had been hoping for a deeper cut of half a percentage point to stimulate the economy and head off an increasingly imminent-looking U.S. recession.

The Fed also lowered its discount rate, the interest it charges banks for loans, by a quarter point to 4.75 percent, making it easier for banks to obtain the cash they need for year-end obligations. Fed officials signaled that further cuts are possible if a severe downturn in housing and a crisis in mortgage lending worsen, but that was not enough to protect the markets. Wall Street plunged Tuesday as investors dumped stocks after some players out there were hoping or estimating they would cut a little bit more.

In its statement Tuesday, the Fed kept the door open for additional rate cuts. And late in the day some Fed officials were privately hinting to the media that they might take additional steps soon, such as by slashing the discount rate further.

The Fed acknowledged problems in its statement.

“Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending,” the Fed said, adding that “strains in financial markets have increased in recent weeks.”

It added: “Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation.”

Billionaire investor Warren Mr Buffett, chairman and chief executive officer of Berkshire Hathaway, said there was “enormous weakness” in housing markets. He gets daily reports from businesses owned by Berkshire Hathaway during the holiday season.

“We’re in the brick business, we’re in the carpet business and those areas have really gotten hit,” the “Sage of Omaha” said. “I’m not so sure we’re going to be beating last year’s figures.” He didn’t specify whether he meant revenue or net income.

The US economy may fall into recession if unemployment rises significantly, Mr Buffet said. “There are a lot of dominoes in the economy that would probably get hit by that,” he added.

On Monday, Morgan Stanley, a Wall Street investment bank, issued a full recession alert, saying it expects a sharp slowdown in business investment as the housing market’s problems spread.

Posted by News LI Editor · Edited by Brianna - Filed Under Money