The Federal Reserve Board voted to reduce both the federal funds rate and the discount rate by three quarters of a percent. In an emergency move, the Fed acted ahead of next week’s scheduled meeting.
Huge sell-offs in Asian and European markets were expected to be matched by a similarly drastic fall in US stock prices. The holiday kept US stock exchanges closed, which allowed for two days of losses overseas.
Some see this as a sign of desperation by the Fed, as it was expected to cut rates just a week later. Other see it as evidence that the Fed is willing to proactively take steps to avoid recession.
Many economists now fully expect a US and global recession in 2008. The expectations range from a mild recession to one of the most severe that we have experienced.
In other related news, Fed Chairman Ben Bernanke and President George Bush have presented ideas about a rebate intended to spur consumer spending. Such a rebate could be up to $800 per person, or $1600 for a married couple.
Such a rebate could help increase spending on many consumer goods. However, many households will likely use it to pay down debt, since many Christmas holidays were financed by credit cards. Most consumers need to repay their credit card balances.
At an rate, a recession appears imminent. We can only hope that most of the losses have already been booked, which could stabilize many capital markets. Otherwise, we may be in for another rough couple of quarters characterized by further sell-offs and interest rate reductions.
Tags: interest rate reductions, recession