Federal Reserve policy makers on Wednesday took the step of cutting interest rates even further to help spur the U.S. economy, but some say the move is a dangerous bet.
The Federal Open Market Committee lowered the federal funds rate by half a percent to 1.25%. This rate is what banks charge each other for overnight loans and is the Fed's primary way of influencing the economy.
As a result of the move, banks are expected to cut their prime lending rate accordingly to 4.25%, the lowest rate since 1959.
In a written statement, the Open Market Committee said it "continues to believe that an accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, is providing important ongoing support to economic activity. However, incoming economic data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production, and employment. Inflation and inflation expectations remain well contained."
Fed officials say they believe that cutting interest rates "should prove helpful as the economy works its way through this current soft spot."
Reaction to the decision was mixed. Some analysts said the move will help the economy. Others questioned whether it will have much impact, considering interest rates have been low all year.
"The Fed is moving into dangerous territory," warned Newport Communications Senior Economist Jim Haughey. The cut means short-term credit rates will be approximately equal to the inflation rate. He says this is an extremely strong monetary stimulus.
"This had better be enough, because if rates fall below 1.5% we will be flirting with deflation. That is playing with fire," Haughey said. "The standard policy option to stimulate an economy at near zero inflation and credit costs is massive deficit spending to boost inflation in order to stop business losses and the resulting layoffs."
The Federal Open Market Committee lowered the federal funds rate by half a percent to 1.25%. This rate is what banks charge each other for overnight loans and is the Fed's primary way of influencing the economy.
As a result of the move, banks are expected to cut their prime lending rate accordingly to 4.25%, the lowest rate since 1959.
In a written statement, the Open Market Committee said it "continues to believe that an accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, is providing important ongoing support to economic activity. However, incoming economic data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production, and employment. Inflation and inflation expectations remain well contained."
Fed officials say they believe that cutting interest rates "should prove helpful as the economy works its way through this current soft spot."
Reaction to the decision was mixed. Some analysts said the move will help the economy. Others questioned whether it will have much impact, considering interest rates have been low all year.
"The Fed is moving into dangerous territory," warned Newport Communications Senior Economist Jim Haughey. The cut means short-term credit rates will be approximately equal to the inflation rate. He says this is an extremely strong monetary stimulus.
"This had better be enough, because if rates fall below 1.5% we will be flirting with deflation. That is playing with fire," Haughey said. "The standard policy option to stimulate an economy at near zero inflation and credit costs is massive deficit spending to boost inflation in order to stop business losses and the resulting layoffs."
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