07 October 2008

The Fed Signals Rate Cut; Remains In Close Contact with Treasury as Banking Crisis Deepens

The Fed is trying to use all the tools at their disposal to ensure the safety of the banking system.

A rate cut at this point does nothing in particular and is largely cosmetic given the special facilites and the new rate cut 'floor' from the payment of interest on reserves.

However, Ben is going to keep throwing junk at the market until it calms down. Or breaks down.

Bernanke Signals Fed May Cut Rates as Crisis Deepens
By Scott Lanman

Oct. 7 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke signaled policy makers are ready to lower interest rates as the credit freeze poses an escalating danger to the economy.

The world financial system is under ``extraordinary stress'' and history shows that severe instability ``can take a heavy toll on the broader economy if left unchecked,'' Bernanke said in a speech in Washington. ``The Federal Reserve will need to consider whether the current stance of policy remains appropriate.''

Today's remarks indicate the central bank's record loans to unblock credit markets are insufficient to prevent a deeper economic downturn. Investors increased bets the Fed will cut its main rate by as much as three-quarters of a point this month after stock indexes slumped to four-year lows and premiums on loans between banks climbed to a record.

``They are going to cut interest rates,'' said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. ``It does not make sense to wait.''

Stocks slid after Bernanke's remarks failed to assuage investors' concerns about deteriorating financial markets, with the Standard & Poor's 500 Stock Index losing 3.6 percent to 1,019.34 at 3:30 p.m. in New York.

Minutes of the Federal Open Market Committee's Sept. 16 meeting, released in Washington today, showed that some officials then saw a need for a rate cut should there be a ``significant worsening of the growth outlook...''