The Federal Reserve on Tuesday morning made an emergency 75 basis point cut to the key Federal Funds target rate amid fresh concerns that the U.S. economy was moving headlong into a recession. The target rate now stands at 3.5 percent. The Fed also lowered its discount rate by 75 basis points to 4 percent. “Broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households,” the Fed said in a statement. “Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.” Despite the move, Bloomberg reported before market open on Tuesday that investor concern was not assuaged by the surprise rate cut:
U.S. stock-index futures tumbled, signaling the worst decline for the Standard & Poor’s 500 Index since 2001, on concern the economy is shrinking and the biggest Federal Reserve interest rate cut in 23 years won’t revive it … “People may see it as an extreme step and feel that it’s a sign the situation is worse than they had anticipated,” said John Carey, who helps oversee about $13 billion at Pioneer Investment Management in Boston. “This will definitely wake people up who were thinking the economy was just fine.”
The Fed’s move is a rare “inter-meeting cut,” coming a week before a scheduled Board meeting, and is the Fed’s strongest signal yet that it is concerned about a recession. MarketWatch reports that the 75 bps reduction is the largest single cut by the Fed since the early 1980s. The last such intermeeting cut was made in the aftermath of the Sept. 11, 2001 terrorist attacks in New York. World markets were roiled Monday by the prospect of a U.S. recession, and while the U.S. stock and bond markets were closed for the Martin Luther King holiday, futures trading had pointed to a significant drop in U.S. equities to start Tuesday’s trading session. Citing “weakening of the economic outlook and increasing downside risks to growth,” the Fed signaled that future rate reductions may be needed, saying that “appreciable downside risks to growth remain.” Click here to read the full Fed statement.
