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Fed Cuts Overnight Rate

POSTED: October 30, 2008, 12:00 pm

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With the nation’s economy still floundering, the Federal Reserve moved to cut its overnight rate by half a percentage point to 1 percent, matching the lows reached in 2003 and 2004. The overnight funds rate is the interest rate the Federal Reserve imposes for transactions between financial institutions. The move comes as the federal government struggles to find ways to stimulate the economy.

The move by the Fed comes as major companies have announced layoffs and the U.S. automobile industry is struggling to stay afloat. With job losses continuing at a staggering rate, the nation is beginning to feel the full effect of the downturn. To date, this year, 700,000 jobs have vanished and there are still three reporting months left for the federal Bureau of Labor Statistics.

While the economy is on life-support, consumers are beginning to lose faith and are curtailing their spending. The Conference Board released its consumer confidence index and October’s number is the lowest in the history of the survey. It is a troublesome sign as the holiday shopping season approaches, a period that retailers depend upon to bolster their yearly sales figures. If consumers hold onto their cash, and are hesitant to use credit over the uncertainty of their long-term financial status, retailers will be in for a dismal shopping season in November and December.

As the Fed continues to try to find the precise rate to stimulate economic activity, the government has already taken a major step to jumpstart the economy with the stimulus package pushed by President Bush and the decision by the Treasury Department to directly invest in banks. According to published reports, the Bush administration is now working on a plan to aid cash strapped homeowners who are facing foreclosure. While financial institutions struggle to stay afloat, the housing crisis that fueled the economic downturn continues to take its toll as thousands of homeowners face the loss of their properties or have already been foreclosed. The housing crisis, precipitated by the collapse of the subprime mortgage market, has a ripple effect as it also means the loss of customers for retailers and the loss of property tax revenue for local municipalities. The fallout in the mortgage market has been particularly hard upon low-income and minority households, as was detailed in a March 2008 report issued by a group of housing advocates from across the country.

It remains to be seen whether this latest move by the Fed will free up credit, though one of the major dilemmas is how to boost consumer confidence in the wake of expected downsizing across industries and continued job losses.

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