US Federal Reserve Chairman Ben Bernanke, criticized last year for being too tentative in cutting interest rates, has now shown he can act boldly. But the US central bank's two aggressive rate cuts in the past eight days have still left investors demanding more.
That may be a sign of how much trouble the economy is facing, with many analysts contending that the country is flirting with a recession and may, in fact, already be in one.
The Fed announced on Wednesday it was cutting its federal funds rate -- the interest that banks charge each other -- by a half-point, double the quarter-point cut that many economists had been expecting. That move followed on the heels of a reduction last week in the funds rate of three-quarters of a point, which had been the biggest rate cut in more than two decades
The Dow Jones industrial average initially rose more than 200 points after the Fed announcement, but then investors pulled back and the Dow finished the day down 37.47 points, indicating lingering worries about the economy.
All the changes mean that the funds rate, which stood at 5.25 percent in early September before the Fed started cutting rates, is now at 3 percent. The Fed is hoping the lower rates will stimulate the economy through increased borrowing by consumers and businesses.
While Bernanke and his Fed colleagues were criticized last year for giving the appearance that they were cutting rates only grudgingly, the rate cuts last month signal that the Fed is in full-blown crisis mode.
The 1.25 percentage point reduction in the funds rate in just over a week is unprecedented in recent memory. The Fed hasn't been that aggressive about cutting the funds rate since the early 1980s, when then-chairman Paul Volcker was reversing a tightening cycle that had driven interest rates to the highest levels since the Civil War in a successful effort to break the back of a decade-long bout of inflation.
In its statement on Wednesday, Fed officials said its string of rate cuts "should help to promote moderate growth over time and to mitigate the risks to economic activity."
Analysts saw that language as an effort to tell markets that just because the Fed slashed rates last month, such bold actions should not be expected in the future. But those words could very well fall on deaf ears.
"The markets felt the Fed had fallen behind the curve. That caused a loss of credibility," said David Jones, chief economist at DMJ Advisors. "Once the Fed loses credibility, it can be hard to regain it."
Investors are already betting that there are more rate cuts to come. A futures contract tied to the federal funds rate is projecting that rate could get down as low as 2 percent this summer.
The Fed's next meeting is on March 18 and that will be followed by meetings in April and June. Many analysts said the Fed could trim the funds rate by a series of quarter-point moves during that period, especially if the economic data remains weak.
The government reported on Wednesday that GDP grew at a barely discernible 0.6 percent rate in the October to December period. Some economists fear that the GDP rate could slip into negative territory in the current quarter. By one definition, a recession occurs when the GDP is negative for two consecutive quarters.
While the Fed is not publicly forecasting a recession, Bernanke and other officials have said they expect to see a period of slow growth, reflecting the impact of the severe housing slump and the credit squeeze which hit last August.
"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," the Fed said in explaining Wednesday's rate cut.
"The Federal Reserve is obviously very nervous about what is going on in the financial system and the housing market," said Mark Zandi, chief economist at Moody's Economy.com.
While Fed officials were widely viewed as being slow to react last fall, analysts said they are now making up lost ground.
"The Fed misjudged the problems in the economy and the financial system through the Fed's December meeting. They just underestimated what was going on," Zandi said. "But I think they caught up in January and now they are fully engaged."
Zandi predicted a series of quarter-point rate cuts at upcoming meetings, but he said that if the financial system begins to unravel, the Fed will return to more aggressive half-point rate reductions.
RETHINK? The defense ministry and Navy Command Headquarters could take over the indigenous submarine project and change its production timeline, a source said Admiral Huang Shu-kuang’s (黃曙光) resignation as head of the Indigenous Submarine Program and as a member of the National Security Council could affect the production of submarines, a source said yesterday. Huang in a statement last night said he had decided to resign due to national security concerns while expressing the hope that it would put a stop to political wrangling that only undermines the advancement of the nation’s defense capabilities. Taiwan People’s Party Legislator Vivian Huang (黃珊珊) yesterday said that the admiral, her older brother, felt it was time for him to step down and that he had completed what he
Taiwan has experienced its most significant improvement in the QS World University Rankings by Subject, data provided on Sunday by international higher education analyst Quacquarelli Symonds (QS) showed. Compared with last year’s edition of the rankings, which measure academic excellence and influence, Taiwanese universities made great improvements in the H Index metric, which evaluates research productivity and its impact, with a notable 30 percent increase overall, QS said. Taiwanese universities also made notable progress in the Citations per Paper metric, which measures the impact of research, achieving a 13 percent increase. Taiwanese universities gained 10 percent in Academic Reputation, but declined 18 percent
CHINA REACTS: The patrol and reconnaissance plane ‘transited the Taiwan Strait in international airspace,’ the 7th Fleet said, while Taipei said it saw nothing unusual The US 7th Fleet yesterday said that a US Navy P-8A Poseidon flew through the Taiwan Strait, a day after US and Chinese defense heads held their first talks since November 2022 in an effort to reduce regional tensions. The patrol and reconnaissance plane “transited the Taiwan Strait in international airspace,” the 7th Fleet said in a news release. “By operating within the Taiwan Strait in accordance with international law, the United States upholds the navigational rights and freedoms of all nations.” In a separate statement, the Ministry of National Defense said that it monitored nearby waters and airspace as the aircraft
UNDER DISCUSSION: The combatant command would integrate fast attack boat and anti-ship missile groups to defend waters closest to the coastline, a source said The military could establish a new combatant command as early as 2026, which would be tasked with defending Taiwan’s territorial waters 24 nautical miles (44.4km) from the nation’s coastline, a source familiar with the matter said yesterday. The new command, which would fall under the Naval Command Headquarters, would be led by a vice admiral and integrate existing fast attack boat and anti-ship missile groups, along with the Naval Maritime Surveillance and Reconnaissance Command, said the source, who asked to remain anonymous. It could be launched by 2026, but details are being discussed and no final timetable has been announced, the source