The Federal Reserve, the U.S. central bank, Tuesday cut short-term interest rates by another three quarters of one percent, bringing the overnight fed funds rate down to 2.25 percent. U.S. stocks had their biggest one-day gain in five years following the bank's decision. Asian markets are sharply higher in early trading Tuesday. VOA's Barry Wood reports that the Federal Reserve is moving aggressively to stimulate growth and contain a credit crisis.
This is the sixth time since September that the Federal Reserve has cut short-term interest rates. With growth slowing and credit markets not functioning properly since January, the Fed has taken more aggressive action, cutting rates three times by a cumulative two percent. Monetary policy changes typically require six to nine months to take effect.
The interest rate cut comes only days after the Federal Reserve orchestrated a reorganization and merger of the Bear Stearns investment bank that had teetered on the brink of insolvency. Bear was the first big U.S. financial institution impacted by the subprime home mortgage meltdown that erupted last August.
Successive measures to restore the normal functioning of the credit markets have largely failed as banks have restrained lending and sought to replenish their depleted capital.
Bill Gross, a bond market specialist in southern California, believes the central bank and government need to do more to halt the deflationary decline in U.S. home prices.
"We have a housing deflation of significant proportions, a levered asset in the American household of perhaps 10 to one [where the homeowner owes up to 10 times his or her cash investment]," he said. "And to the extent that you bring down housing prices you almost eliminate their ability to increase their purchasing power and therefore produce a recession."
Gross spoke on CNBC television.
Many economists believe the U.S. economy is already in recession, which is typically defined as six consecutive months of negative growth.
By aggressively cutting interest rates to avert or ameliorate recession the Federal Reserve is identifying the restoration of growth and investor confidence as its principal objective. Left for a later date is the fight to combat the inflationary pressure of record high oil prices as well as rises in food and other commodities. The Fed says the inflationary problem is real but that slower growth should mitigate an overall inflationary surge.
President Bush, who earlier announced measures to ease the recession in housing, says the administration is ready to take necessary action to boost the economy. Last month the administration and Congress agreed a package of fiscal stimulus, whose centerpiece is rebate payment of up to $600 to most taxpayers. The rebate checks will be mailed out in early May.
