The Fed has become rather agile reacting quickly to any signs of further downturn in the US economy. In keeping with the current trend of monetary activism, the Federal Reserve has further reduced the Fed rate by half basis point to 3%. This rate cut is fifth in four months. The latest cut in the Fed rate was in response to the news that the US GDP growth rate has slacked to a mere 0.6%.
As an immediate response to the Fed rate cut, banks announced lowering their prime lending rate to 6% from the current 6.5%. The cheap lending rate is believed to make credit cheaper and coupled with the stimuli expected to be garnered by increased fiscal spending as was announced by the US congress, the downturn of the economy is expected to be reversed.
The sub-prime lending crisis that is said to be mainly responsible for the current state of the financial sector is attributable mainly to irresponsible lending to borrowers with dubious credit rating. Learning from their past mistakes the mortgage market and other lending institutions will follow a more stringent policy. Cheap credit will definitely help serious investors to take advantage of the current situation. The soon to be effective Congressional plan is also expected to offer tax concessions to investors.
However, inflation continues to plague the economy. High energy and food prices have pushed inflation to 2.7% in the last three months. Stagnating economic growth rate together with inflationary pressure might move the economy to stagflation if immediate results do not emerge from the monetary and fiscal policies. Some economists are of the view that further interest rate cuts are required to prevent the US economy from plunging into recession.
Comments
This is unprecedented. It never went down so much. Last years slowdown is solely attributed to sub-prime meltdown. Hope this boosts the economy.