Fed Rate Cut Fails to Impress Wall Street

11 December 2007 -- The Federal Reserve, the US central bank, Tuesday cut short-term interest rates for the third time in as many months, but the move did not impress investors on the Wall Street. The New York Stock Exchange took a tumble, anticipating a larger cut.

The quarter point reduction in the overnight fed funds rate, at which banks borrow from each other, brings the overall cut down by a full percentage point since mid-September. This key lending rate now stands at four and one quarter percent. Rates on credit card and home equity debt generally move in tandem with fed funds.

In its statement, the bank's open market committee said financial strains in the economy had increased in recent weeks, boosting uncertainty about future economic activity.

But investors were disappointed with Tuesday's cut, expecting the key rate to be slashed by half a percentage point. Stock prices began to decline on the news and the Dow Jones Industrials closed nearly 300 points lower.

Kenneth Rogoff is an economics professor at Harvard University and a former chief economist at the International Monetary Fund.

"I realize a lot of people were disappointed, but the Fed has a longer-term view," he said. "They do need to anchor inflation. You know, if they see inflation is elevated, which it is, there's no rush to bring the interest rate down."

Robert Parry, a former governor of the Federal Reserve Bank of San Francisco, is critical of the Fed decision.

"I think they should have characterized the slow down in growth as being a significant slow down," he said. "And I also think it would have been stronger if they had said that the balance of risks had changed."

Parry and Rogoff spoke on CNBC Television.

Since August, global financial markets have been hobbled by problems in the American mortgage market. Many banks have lost a lot of money after years of making questionable loans.

As a result, it has been harder in recent months for even the highest rated borrowers to obtain a loan, endangering future economic growth. Economists say the problem is far from resolved and is compounded by declining U.S. home prices.

Source: VOA News

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