Federal Reserve makes big interest rate cut

Last Updated: Tuesday, January 22, 2008 | 10:34 AM ET

CBC News

Faced with a slowing economy and a battered equity market, the U.S. central bank on Tuesday made an unscheduled interest rate cut.

The Federal Reserve cut the federal funds rate — what big banks charge each other for overnight loans — three-quarters of a percentage point to 3.5 per cent.

The Fed said it sees the risks to the health of the U.S. economy growing.

"While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households," the central bank said in a statement.

"Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labour markets," the Fed said.

The Federal Reserve's next interest rate decision was scheduled for Jan. 30. The move to lower borrowing costs comes just over a week in advance of that.

The rate cut was the first between-meeting move by the Fed since Sept. 17, 2001, in the days after the Sept. 11 attacks against the U.S.

Weakness in the U.S. housing market — including rising foreclosures and defaults, coupled with slow sales and stagnant prices — has put the brakes on the U.S. economy in recent months. U.S. retail sales fell by 0.4 per cent in December, usually a buoyant time because of holiday shopping, raising more warning flags.

Worries of a U.S. economic slowdown have sent global equity markets sharply lower in recent days.

'The Fed now gets it'

Some analysts don't believe the Fed's action is an instant cure-all.

"The economy is still staring recession in the face, but at least the Fed now gets it," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

Dennis Gartman, author of the widely followed The Gartman Letter, said he was surprised at the emergency rate cut, adding that he believes the Fed should have held off until its regularly scheduled meeting on Jan. 30.

"I think moving in anticipation of its own meeting sends kind of a bad signal. I think the public says 'What does the Fed know that we don't know? What does the Fed know that we haven't been told?' " he said.

While the Fed was chopping borrowing costs, U.S. Treasury Secretary Henry Paulson was pushing for the quick passage of an economic stimulus package unveiled last week. The package would include tax cuts, but it must still win the approval of the U.S. Congress and the White House.

"Time is of the essence and the president stands ready to work on a bipartisan basis to enact economic growth legislation as soon as possible," Paulson told a meeting of the U.S. Chamber of Commerce in Washington, D.C.