Fed aggressively cuts funds rate

March 18, 2008 9:01:05 PM PDT
Wall Street cheered the move by the Federal Reserve Tuesday, cutting a key interest rate by three-quarters of a percent.The aggressive action is aimed at easing the crisis in the credit markets.

The stock market jumped more than 400 points Tuesday.

The Federal Reserve, led by its chairman Ben Bernanke, has now cut interest rates six times since last September. But will it be enough to prevent the nation's economy from slipping into a recession?

The Federal Reserve members struggled with a balancing act. They're looking to move out of the sluggish economy while at the same time avoid raising inflation. Right now, concern about the weak economy is what sparked the another aggressive rate cut by the Fed.

The Federal Reserve bank slashes the federal funds rate by three quarters of a percent. The cut was anticipated and comes after an unusual weekend rate cut by the Fed.

Stocks were up Monday in anticipation of Tuesday's move. Goldman Sachs and Lehman Brothers reported better than expected earnings. Those reports also buoyed investors' confidence.

But there was a sharp drop in the market upon Tuesday's announcement before the market corrected by the close of trading. At Illinois Institute of Technology's Stuart Graduate School of Business, the director of the financial markets program said it exemplifies the volatility of the economy.

"I think what we're observing now is a major conflict at the Federal Reserve between the concern for price stability on the one hand and the concern for the credit crisis on the other," said Dr. John Bilson, IIT Stuart School of Business.

Bilson says those who are investing long term should try to weather the storm, but those looking to make major life changes in the coming years may want to shift their investments.

"If you are one of the baby boom generation who is contemplating retirement in three to five years, then I think it's time that we really should become a lot more conservative," said Bilson.

For some Americans, this drastic downturn in the economy has already hit home. A few years ago, the Maldonados felt confident enough in their finances to buy a vacation home. But now their financial future is bleak.

"Prior to all this we had good credit. We feel like we've worked so hard to get where we're at, and that's just gone in an instant," said Shawn Maldonado.

Professor Bilson says a volatile market typically follows any announcement by the Fed. So we'll likely see more ups and downs through the week. The Fed's moves are attempts to ease concerns about the nation's banking system and stock market, but that anticipated payoff may not be in the near future.

Students in one local introduction to finance class get real life applications. Professor Don Schwartz said he finds these MBA students at Loyola University are paying close attention to the economy and their finances.

"Never seen things change so rapidly or so many things being done differently," said Schwartz.

For students, the slow down in the economy can mean trouble in the real world after graduation: finding jobs, paying back student loans, their parents ability to finance school and the university's ability to offer financial aid and scholarships.

"You have to be careful with a lot of your spending just because you don't really know whether or not your situation is going to be safe due to the unstable economic situation," said An Phang, Loyola graduate student.

"With the recession going on and the loss of jobs, it is hard to find a job," said Keisha Doxey-Winder, Loyola graduate student.

"They've provided exactly the right medicine for a very sick financial market and a very weak economy," said David Jones, DMJ Advisors of the Fderal Reserve's lowering of the key interest rate.

The market also responded to better than expected earnings from two big investment banks, which eased fears that there would be another bank failure like Bear Stearns.

Back in class, lectures examining this volatile market and downturn in the economy may be lessons that last a life time.

The latest action brought the federal funds rate -- the interest that banks charge each other -- down to 2.25 percent, the lowest point since late 2004. It marked the second back-to-back cuts of three-fourths of a percentage point.

In Jacksonville, Fla., Tuesday, President Bush said the government will take further action -- if necessary -- to help the sagging economy.

The Associated Press contributed to this report.


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