The Federal Reserve sliced interest rates by a half-percentage point Wednesday, another significant cut that follows on the heels of the emergency three-quarter percentage point reduction just eight days ago on Jan. 22.
The federal fund rate, an overnight bank lending rate that affects how much interest consumers pay on credit cards, home equity lines of credit and auto loans, was cut to 3.0% from 3.5%.
The cumulative 1.25 percentage point reduction in the benchmark overnight rate in less than two weeks is part of an aggressive approach to swing the economy back in gear, calm investors and help the beleaguered housing market.
The discount rate, which is what banks pay to borrow directly from the Federal Reserve, was also cut by a half-percentage point to 3.5%. On Jan. 22., the discount rate was cut by three-quarters of a percentage point.
The Federal Open Market Committee said in a statement after their decision:
“Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain …”
“…The committee will continue to asses the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."
The language would seem to suggest additional rate reductions are likely should growth decline.
Gold Soars to new record
The Fed news met investor expectations and sent stocks higher on Wall Street. Within minutes of the announcement, the Dow Jones industrial average was up 100 points.
Gold and Platinum were topsy-turvy prior to the Fed announcement. Many analysts expected a Fed cut to set the stage for a further gold rally.
That rally has started. Gold futures jumped to a new record high of $941.70 an ounce on the New York Mercantile Exchange (NYMEX). According to Jon Nadler, senior analyst at Kitco Bullion Dealers, the Federal Reserve’s 50 basis points rate cut:
“… sets the stage for a further rally in gold, but the upside target remains near $940 and probably not much beyond $950 at the moment. Conditions are becoming overbought, and South African production problems have been addressed for the time being."
Most South African mines, which are leading world suppliers of gold and platinum, now have power after countrywide power shortages and blackouts forced all mines to close down last week.