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Fed Takes Overnight Rate to 1% In June 2003 the Federal Reserve, under Alan Greenspan’s tenure, dropped its Federal Funds Rate to 1.0% - the lowest level in over 40 years. As of yesterday, overnight interest rates have come full-circle in the US, with the Federal Open Market Committee (FOMC) announcing it will again lower the Fed Funds Rate by 0.5% to 1.0%. Stock markets in the US were higher following the announcement, but dropped sharply in the final minutes of trading on concerns that the rate cut won’t be enough to avert a nasty recession. In its press release, the FOMC stated: "The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures" There is little debate that the US economy is already in recession, and aforementioned ‘consumer expenditures’ may be one of the most relevant determinants of the recession’s magnitude. Recent announcements of retail sales and consumer confidence have been downright grim. It remains uncertain whether the unprecedented US Government and Federal Reserve actions will be enough to restore confidence in the US financial system and revive the economy. The FOMC also made it clear that inflation concerns remain safely on the back-burner: "In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability." It will be very interesting to see what US authorities do from here. With a Fed Funds Rate of 1.0%, the potential for future rate cuts is limited.
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