Fed Drops Target Rate 50 Basis Points

In some good news for the mortgage industry, the Fed today cut its target for the federal funds rate 50 basis points to 4.75 percent, the first cut in the target rate in four years — a move that appears to have been driven by concerns that the housing and mortgage slump might be driving wider economic markets towards a recession.

Most economists had predicted a 25 basis point drop, as the Associated Press notes, although HW readers likely already were aware of my feeling that we’d need to see a 50bp cut if the Fed was going signal its intent to take the housing crisis seriously.

From the FOMC statement:

Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.

Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

The central bank also hacked away further at the discount rate, cutting it another 50 basis points to 5.25 percent.

I think it’s pretty clear that the Fed is concerned about how the ongoing mortgage mess will play out at this point. I also want to call attention to the use of the word “forestall” in the Fed’s statement. Not “avoid.” Not “mitigate.” Rather, “forestall.”

This suggests that the Fed may not be done cutting rates, and/or that the Fed Committee feels that the “adverse effects on the broader economy” mentioned may ultimately be unavoidable — perhaps suggesting a sort of let’s-try-not-to-face-everything-bad-all-at-once approach.