That was a quiet sign that some Fed presidents did not yet see the need for lower rates at that time. 18, 5 of the 12 regional banks did not request a reduction in the discount rate, the rate at which banks can borrow directly from the Fed. But the fear abated and the economic boom did not slow that year.Īt the Fed’s policy meeting on Sept. Then, as now, credit markets began to freeze up as investors worried about defaults. The president of the San Francisco Fed, Janet Yellen, cautioned in a speech last month that the Fed cut rates dramatically after the Russian financial collapse in August 1998. “If the Fed is in the business of managing risks, as it claims to be, the argument in favor of easing is, in our view, overwhelming,” wrote Ian Shepherdson, an economist at High Frequency Economics, in a research note on Tuesday.īut at least some Fed officials have worried about reacting too strongly. That was the eighth consecutive monthly decline, and the steepest since April 1991. On Tuesday, Standard & Poor’s reported that its Case-Schiller index of housing prices in 20 major cities had declined 4.4 percent in August, compared with a year earlier. The nationwide average price of homes have declined almost 5 percent in the last year, the first time on record that has happened in the United States. Sales of existing homes have dropped 30 percent since their peak in 2005, and the supply of unsold homes last month reached its highest level in more than 19 years. Housing starts in September were down 31 percent from the year before. Defaults have climbed sharply on mortgages to subprime borrowers with weak credit histories, and analysts are predicting anywhere from 500,000 to 2 million foreclosures on subprime loans by the end of next year.įed officials and private economists alike have predicted that the housing market has yet to hit bottom. The most recent data on home sales, housing prices and construction have all been worse than analysts expected. The unemployment rate, at 4.7 percent, is low and has barely budged. Job creation has slowed in recent months, but employers are still hiring more than firing and wages are rising faster than inflation. 30.Ĭonsumer spending, which accounts for more than two-thirds of America’s economic activity, climbed 3 percent. Yet just a few hours before the Fed announced its decision, the Commerce Department reported that the nation’s gross domestic product expanded at a healthy pace of 3.9 percent in the quarter that ended Sept. But it also reflected the conflicting pressures that face the central bank: despite an unprecedented downward spiral in housing, the rest of the economy has yet to show signs of serious trouble. That was more sanguine than the view of many investors and analysts on Wall Street, who have been clamoring for easier money from the Fed. But it said “some inflation risks remain” and that the risks of inflation were “roughly balanced” against the risk of slower growth. In a statement accompanying its decision, the Fed acknowledged that the housing collapse is likely to slow the economy. The dollar modestly weakened against other major currencies. Oil prices surged nearly 4 percent and gold futures were up about 1 percent. But Treasury prices fell, reflecting some concerns that lower interest rates could stoke inflation. Investors were generally pleased, and stocks were up modestly after briefly giving up most of their gains for the day immediately after the announcement. But the vote was not unanimous, reflecting disagreement among policymakers about the risks that confront the economy. The move, to reduce short-term rates by a quarter point to 4.5 percent, was aimed at preventing the meltdown in housing from crippling the rest of the economy. 31 - The Federal Reserve gave investors what they wanted today, lowering short-term rates for the second time in two months.īut it quietly warned Wall Street not to expected to assume that more reductions are ahead.
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