Federal Reserves Yet Another Move To Tackle Foreclosures

May 7th, 2008

The Federal Reserves took yet another move to tackle foreclosures. The chairperson of the Federal Reserves, Ben Bernanke gave his assent to the lowering of the benchmark federal funds rate to 2%. It was a quarter percentage drop. At the start of the 2008 it was 4.25%. Dallas Fed president Richard Fisher, and Philadelphia Fed president Charles Plosser disagreed. They did not want the cut in rates.

In a statement the Fed press stated that “the substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity.” It also emphasized its concern for inflationary pressures rather than more weakening. This was an indication the rates will not be further tampered with but allowed to remain steady in the forthcoming months.

The chief economist of Societe General in New York cynically commented that the statement was a “soft non-binding pause.” Another economist, James Glassman from J.P. Morgan Chase said that it was not required of the Federal Reserve to make comments about its future course of action. Investors in general were expecting this rate cut. As a result the stocks soared.

It is necessary to bear in mind that the Federal Reserve has slowed down in the pace of cutting rates. The last time it did so was a three quarter percent cut on 18th March. Since September 2007 this is the 7th rate cut. During this period the central bank has lowered lending rates by 3.25%. It decided not to pause to so as to give the economy a boom and to provide coverage against risk. The fear of the credit crunch triggering off a downward growth haunted their actions. The economy as a whole is somehow avoiding recession by using stepping-stones. The commerce department reported that the growth was at a pale 0.6% during the second quarter. But financial experts feel that this cannot go on indefinitely and recession is bound to take over. Henry Paulson, treasury secretary feels the fiscal stimulus measures will act as life belt and bail out the economy.

The money released by the government will give a boost to consumer spending but it will make it difficult to get at the roots of the problem. Labour markets are falling, while gas prices are rising. Good exports are keeping things somehow running.