Fed Reduces Rate by Half-Point; 2nd Cut in 8 Days; Bernankie Worried?

The Federal Reserve cut interest rates today at their 2:15 scheduled meeting. They lowered interest rates by 50 basis points or a half-percentage point, making the Federal funds rate 3%. The prime rate for borrowing on home loans, credit cards, and personal loans are currently down to 6%. Within the past 9 days the Fed has cut interest rates by a total of 1.25% or 125 basis points. This indicates a lot about the worries of the Fed. The more the interest rate is cut, the more inflation grows; so if the Fed decreases rates they increase inflation. Inflation increases because when the interest rate is decreased the value of the dollar goes down and is worth less.

The aggressive decreasing of interest rates shows that the Fed is worried and scared about economic growth and doesn’t have much care or concern for inflation. The rate cut is better for big business and bad news for the impoverished of America who feel inflation. According to the Commerce Department, the national estimated economic growth for the 4th quarter of 2007 fell to a sluggish annual rate of 0.6% from a high 4.9% in the 3rd quarter of 2007.

Congress just approved President Bush’s $146 billion dollar Economic stimulus package in the form of deficit-financed tax rebates to jolt the sluggish economy by increasing consumer spending. The Fed’s rate cuts and Congress’s stimulus package should jump start the economy if taken in together or at least minimize the threat of a recession, which some may argue that we are already in.

Recession- a significant decline in activity in the Economy, it’s visible in Industrial production, real income, employment, and wholesale-retail trade. A recession last anywhere from 6 months to 2 years, generally. The technical indicator of a recession is two quarters of negative economic growth as measured by a country’s GDP.

Inflation- is the significant rise in the general price of goods.

Deficit-financed- Paid for by means of a deficit, without sufficient funds, borrowed.

Rebate- money given back that was already paid.

http://www.nytimes.com/2008/01/30/business/30cnd-fed.html?hp