Fed’s delicate economic balancing act

Kai Ryssdal Mar 18, 2008


KAI RYSSDAL: It’s been a whiz-bang couple of days for the Federal Reserve Bank of the United States. First it bails out a big Wall Street investment bank — we told you about Bear Stearns yesterday. It’s also decided to start making loans to brokerage houses and securities dealers in yet another attempt to free up the credit markets.

Used to be only big commercial banks could borrow from what’s called the Fed’s discount window. And then today, Mr. Bernanke and company jumped into the economic breach one more time. They cut short term interest rates just like everyone knew they would.

The only real question was how much — Greg McBride’s with BankRate.com:

Greg McBride: If the Fed had opted for a less-aggressive move, cutting rates by say half a percentage point instead of three-quarters of a percentage point, you certainly wouldn’t have been greeted with the euphoria on Wall Street. The market would have taken that as a big disappointment.

Two things to mention: First, the cut was actually right at 75 basis points — that’s Wall Street talk for three-quarters of a percent. Also, the Dow was up almost 300 points when the Fed made its announcement.

There was a hiccup or two, but all three major indices ended the day gaining more than three-and-a-half percent or more. That’s in spite of some not-so-promising things the Fed said about what’s coming down the pike. Specifically, inflation’s still a problem, but so is slowing economic growth. Again, Greg McBride:

McBride: The Fed has a delicate balancing act here between confronting the credit crunch now versus the prospect of inflation down the road.

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