The Federal Reserve today lowered its target rate for the federal funds rate to 4.5 percent and slashed the discount rate to 5 percent.
The 25-basis-point reduction in both short-term rates was less drastic than similar action the Fed took last month as a response to financial market disruption stemming from losses in mortgage lending, but was in line with many analysts’ expectations.
On Sept. 18, the Fed slashed 50 basis points off both the federal funds rate — the rate banks charge each other for overnight loans — and the discount rate, the rate the Fed charges for direct loans to banks (see Inman News story).
Mortgage Bankers Association Chief Economist Doug Duncan said earlier this month he anticipated a 25-basis-point reduction in the federal funds rate in October, and predicted it could be the last adjustment needed to reach a “neutral” position that allows for moderate growth while keeping inflation in check.
In a statement announcing today’s decision, members of the Federal Reserve’s Open Market Committee said much the same thing — that “after this action, the upside risks to inflation roughly balance the downside risks to growth.”
Economic growth was solid in the third quarter and strains in financial markets have eased somewhat on balance, but the Fed said it expects the housing downturn to intensify, slowing the pace of economic expansion in the near term.
Analysts who fear the housing downturn will lead to a recession were hoping for another 50-basis-point reduction in the federal funds rate, but the Fed has to weigh consequences such as further weakening of the dollar and inflation.
Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, voted against lowering the federal funds rate, saying he preferred to leave it at 4.75 percent.
