Federal Reserve Cuts Interest Rates

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The Federal Reserve has been working hard to influence the direction of the economy through monetary policy. The Fed attempts to expand the economy at a steady rate in order to achieve sustained long-term velocity. Also, the Fed endeavors to keep inflation at a low level, uphold price stability. These tasks are challenging in the world's biggest economy, with divergent and complex economic sectors. To remain focused on its goals, the Fed identifies economic risks and attempts to mitigate them.

Herein, on September 18 the Fed cut interest rates by a half point, the first such cut in over four years. The Fed Chair Ben Bernanke worried about an economic slowdown, threats to the mortgage sector, housing arena, and fluidity in the credit markets took the bold step to slash the key interest rate.

The lowering of the interest rate to 4.75 percent may provide respite from the painful credit crunch and housing slump. This move by the Fed could help increase consumer confidence before the all important holiday season, key to retail sector profits.

The profits on Wall Street soared on the news of the rates cuts last Tuesday. The S&P 500 index jumped by 2.92% or 43.13 points to 1,519.78, while the Dow Jones industrial average (DIJA) rose 2.51% or 335.97 points to 13,739.39, DIJA's first 300-plus point gain since October, 2002. Also, the Nasdaq composite index surged by 2.71% or 70.00 points to 2,651.66. The enthusiasm of the market was also shared by politicians as well.

The politicians see residual economic progress in the various sectors of the economy, from auto, manufacturing, housing, retail, and so on. Also, the Fed took to interest rate cuts to starve off perceptions of risk within the markets as related to credit liquidity.

In the middle of the year, the Fed had infused billions into the credit arena to improve liquidity. The measure was meant to forestall any credit crunch. The central bank sees real GDP increasing this year to around 2.3 to 3 percent, for 2008 an increase to about 2.75 to 3 percent.

In order, to navigate the economy though the rough waters, the Fed is acutely aware of both growth and inflation. Bernanke and the Fed had been extremely hesitant to cut the interest rates in the past but they were receiving extreme pressure from various groups to cut rates, especially Wall Street and politicians. So it seems, in the Feds judgment the risks and short-term versus long-term effects associated with interest rates merited a rate cut. Let us hope that the interest rate cuts help in reinvigorating the economy in all realms.

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