Federal Reserve Coordinates Interest-Rate Cut

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WASHINGTON, DC-After declining to lower rates last month, the Federal Reserve Bank is deciding to revisit that decision. This morning the Fed cut its key lending rate to 1.5% in a coordinated effort with the European Central Banks, as well as China and the central banks in Britain, Canada, Sweden and Switzerland, which all cut rates this morning.

Federal Reserve chairman Ben Bernanke said as much to the audience at the National Association of the Business Economics on Tuesday. Data on the economy and “recent financial developments” suggest that the outlook for economic growth has worsened, he said. “In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate.” Translation: the federal funds rate target may drop below 2%, after several months of remaining at that level.

Up until September the real estate industry had been relatively sanguine about the Fed’s apparent concern that inflation was the greater risk to the economy. By Sept. 17th, though–days after Lehman Bros. declared bankruptcy and Merrill Lynch was acquired by Bank of America–that had changed. In a conference call that Tuesday in September when the Fed declined to cut rates, Brian Bethune, chief US financial economist at Global Insight, told listeners that at least a 50 basis point cut was needed.

A cut will help if only because the market is beginning to price it into trading, Steve Pumper, executive managing director in Transwestern’s Investment Services Group, tells GlobeSt.com. “But the concern I have is that while a fed funds cut would be positive the illiquidity in the marketplace is not going to move spreads. The federal fund rate has moved from 5-and-a-quarter to 2% and spreads have still increased dramatically.”

It is hoped, though, that the unprecedented level of capital the government is throwing at the current crisis situation will start to have some affect. The government has wasted no time implementing the tools the financial rescue plan delivered. Its latest move, announced on Tuesday–the Fed would begin purchasing commercial paper after the money market funds decided these investments were too risky for them.