The Federal Reserve slashed short-term lending rates by a half percent, which was deeper than expected, sending the major U.S. stock indexes climbing by more than 2 percent Tuesday afternoon. The Fed said in its closely watched statement that the sharp cut was needed to keep the housing slump and credit crunch—which have roiled financial markets recently—from damaging the broader economy.
The Fed made its usual noise about the threat of inflation, said David Bogoslaw in BusinessWeek Online. But it’s clear that “the magnitude of the credit crisis assumed centerstage in the Fed's deliberations.” This cut will send rates on adjustable-rate mortgages down, and that will be a source of relief. The decision was unanimous, even though most observers thought the majority of the members of the Federal Open Market Committee favored just a quarter-point rate cut.
So much for Fed Chairman Ben Bernanke’s “carefully nurtured reputation as an exceedingly cautious inflation fighter,” said Andrew Leonard on Salon.com. Whether he likes it or not, Bernanke has just established himself as someone who, “in the glorious tradition of his predecessor Alan Greenspan,” is willing to “jump in and save the financial markets from their own excesses.”
It’s true that it’s not the Fed’s job to rescue investors who took on too much risk, said Douglas Roberts on BloggingStocks. But dealing with “the moral hazard issue”—here, fiddling with the markets to save people who made bad bets on bundled risky mortgages—will have to wait. For now, “forestalling a recession” is the bigger priority, and this rate cut will come in handy in that fight.
Actually, this super-sized rate cut “could make matters worse,” said Chris Isidore on CNNMoney.com. Most economists still don't even think we’re heading for a recession, and even if we were “the Fed can do little at this point to address many of the factors threatening continued economic growth.” But a steep rate cut can discourage foreign investors from buying U.S. Treasurys, for example, and we need their money to “keep long-term interest rates low.”