The 10 brilliant minds who make up the Federal Reserve met yesterday to once again discuss the state of the economy and determine the action needed by them to aid a struggling American economy. In an aggressive move, they lowered another 1/2 percent, resulting in a historically low 1% Fed funds rate. The Fed funds rate is one way the Fed uses to regulate the supply of money to the US Economy.
The following is an official press release from the Fed regarding its decision today, and a translation (for the rest of us) of all the financial jargon by Bob Walters, Chief Economist for Quicken Loans:
Release Date: October 29, 2008
For immediate release
Now
The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.
The 10 folks who get to decide what short term rates will be (the Open Market Committee) decided to slash short term rates from 1.5% to 1.0%. They did this to hopefully drop short term rates to encourage banks to lend and people to borrow (so they will hopefully make more stuff, buy more stuff and create more jobs) to help the economy start growing again.
The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.
You and I aren’t hitting the malls as much as we were before, and the result of that is the economy is slowing down. Businesses around the world are buying less of stuff like heavy machinery and slushy machines, and that is contributing to the slowdown as well. Lastly, all the craziness on Wall Street means it’s becoming tougher for people to get a loan. Without loans – there is less $ to spend and the slowdown continues…
In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.
If people don’t buy any stuff, because they lose their jobs or worry about losing their jobs, companies that sell stuff have to lower the price of that stuff to get people to buy it. The Fed likes it when the price of stuff is like Goldilocks – not too high or too low.
Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.
The Fed is saying that they are doing everything in their power to try and keep the economy moving. Today’s cut in short term rates is only one of those things. They have also been giving money to struggling banks and taking loans in trade – in hopes that the banks will lend that money to each other and to consumers to get the party started again.