The Fed Slashes Interest Rates in Emergency Session

A day after global financial markets plunged on January 21 amid fears of a pending recession, the Federal Reserve chose not to wait until its end-of-January meeting and slashed the federal funds rate by three-quarters of a percentage point to 3.5% from 4.25%. The federal funds rate is the rate banks charge each other on overnight loans. It was the biggest one-day move by the central bank in recent memory and underscores its concern about a potential recession. In a statement, the Fed said it had decided to cut the federal funds rate "in view of a weakening of the economic outlook and increasing downside risks to growth." Commercial banks responded to the Fed's action by announcing similar cuts on the prime lending rate, the benchmark for millions of business and consumer loans. The action will mean the prime lending rate will drop from 7.25% to 6.50%. In addition, the Fed reduced its discount rate, the interest it charges to make direct loans to banks, by three-quarters of a percentage point to 4%. The Fed also said, that "appreciable downside risks to growth remain" and held out the prospect of further rate cuts.

Meanwhile, Treasury Secretary Henry Paulson said that Congress and the Bush administration need to agree quickly on a package of tax cuts designed to give the economy a shot in the arm. President Bush recently approved a tax relief stimulus package that would total about $150 billion. The Bush Administration added that it will not rule out adding to the $150 billion stimulus proposal, if necessary.

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