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.
TYPHOON: The storm’s path indicates a high possibility of Krathon making landfall in Pingtung County, depending on when the storm turns north, the CWA said Typhoon Krathon is strengthening and is more likely to make landfall in Taiwan, the Central Weather Administration (CWA) said in a forecast released yesterday afternoon. As of 2pm yesterday, the CWA’s updated sea warning for Krathon showed that the storm was about 430km southeast of Oluanpi (鵝鑾鼻), Taiwan’s southernmost point. It was moving in west-northwest at 9kph, with maximum sustained winds of 119kph and gusts of up to 155kph, CWA data showed. Krathon is expected to move further west before turning north tomorrow, CWA forecaster Wu Wan-hua (伍婉華) said. The CWA’s latest forecast and other countries’ projections of the storm’s path indicate a higher
SLOW-MOVING STORM: The typhoon has started moving north, but at a very slow pace, adding uncertainty to the extent of its impact on the nation Work and classes have been canceled across the nation today because of Typhoon Krathon, with residents in the south advised to brace for winds that could reach force 17 on the Beaufort scale as the Central Weather Administration (CWA) forecast that the storm would make landfall there. Force 17 wind with speeds of 56.1 to 61.2 meters per second, the highest number on the Beaufort scale, rarely occur and could cause serious damage. Krathon could be the second typhoon to land in southwestern Taiwan, following typhoon Elsie in 1996, CWA records showed. As of 8pm yesterday, the typhoon’s center was 180km
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STILL DANGEROUS: The typhoon was expected to weaken, but it would still maintain its structure, with high winds and heavy rain, the weather agency said One person had died amid heavy winds and rain brought by Typhoon Krathon, while 70 were injured and two people were unaccounted for, the Central Emergency Operation Center said yesterday, while work and classes have been canceled nationwide today for the second day. The Hualien County Fire Department said that a man in his 70s had fallen to his death at about 11am on Tuesday while trimming a tree at his home in Shoufeng Township (壽豐). Meanwhile, the Yunlin County Fire Department received a report of a person falling into the sea at about 1pm on Tuesday, but had to suspend search-and-rescue
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