No central banker wants to have “recession” on his resume.
With that in mind, and with the odds of one rising, Treasury yields tumbling, housing imploding, credit standards tightening and derivatives’ losses mounting, the Federal Reserve took bold action yesterday, lowering its benchmark interest rate by 50 basis points to 4.75 percent, the first cut in more than four years.
In a separate action, the Fed’s Board of Governors lowered the discount rate by 50 basis points to 5.25 percent, maintaining the spread between the overnight rate and the penalty rate at which depository institutions can borrow directly from the central bank for 30 days, using securities as collateral.
The rate cut was more aggressive than most economists expected. Even so, the Fed gave no indication that inflation was dead or concern about it a dead issue. While core inflation has improved modestly this year, the Fed said in an accompanying statement that “some inflation risks remain.”
So why cut rates? Isn’t inflation the numero uno concern for central bankers, an end in itself as well as a means to achieve maximum sustainable growth?
Something clearly trumped inflation: A “tightening of credit conditions,” along with disruptions in financial markets, has “the potential to intensify the housing correction and restrain economic growth,” the Fed said.