Fed Cuts Rates by 50 Basis Points

In a move that's sure to disappoint the stock market, the Federal Reserve cut the fed funds rate by 50 basis points to 5% today. Whether the Fed would cut rates by 50 or 75 basis points was considered a toss-up, but the Fed opted for the smaller move, probably due to recent economic reports indicating a slowing, rather than a recession, in the economy.

Between Jan. 3 and now, the Federal Reserve has acted drastically in cutting interest rates, in order to spur borrowing and demand in the economy, which fell sharply in the fourth quarter of last year. The Fed has now lowered the fed funds target by 1.5 percentage points from 6.5%, where it stood before the committee undertook a surprise rate cut Jan. 3.

The move attempts to balance the signals being given in economic reports, which show a reasonable amount of demand in the real estate and automobile markets, as well as in the level of foreign demand, against the sharp declines in business investment and the steep drop in the stock market.

Economists interviewed over recent days expressed the belief that the equity market was indeed giving off the strongest warning signs about the economy, but Fed officials in recent weeks have indicated that the equity market alters their forecast only in respect to how it affects consumer confidence. ...