After the news that the job market remained stronger than expected, most weren't sure what type of interest rate cut the Federal Reserve would make: 25 basis points or 50 basis points. They decided to go with the 25 basis point cut at this time.
The Fed also cut its discount rate by 25 basis points, to 4.75 percent.
The federal funds rate is that which banks use when borrowing funds from each other overnight. The discount rate is what banks use to borrow directly from the Federal Reserve.
Concerning the rate cuts, the Fed said in a statement: "Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time."
While over the short term most will applaud this move, it does bring with it risks, and moves further away from Bernanke's focus on reining in inflation. It will also continue to put pressure on the American dollar, weakening it even further.
On the other hand, American manufacturers should love this, as the weak dollar helps their products more affordable and desirable to foreign buyers, which also helps shrink the trade deficit.
It also brings more tourist dollars into the U.S. as well, with many people getting deals rarely coming in their lifetimes. We should see that help tourist destinations, even while domestically people are cutting back on spending.
Even with the cuts, a number of U.S. economists are predicting we'll probably have at minimum a mild recession, with no gross domestic product growth from now until the third quarter of 2008. The same economists say that during that same time period, corporate earnings will shrink from between 5 to 10 percent.
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