The Fed Lowers Interest Rates by a Quarter Point

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

The Federal Reserve lowered its benchmark interest rate by a quarter point to 4.25%, while signaling officials are open to further cuts if the housing slump and credit squeeze worsen.

Treasury notes surged after the decision, while stocks fell, which some economists said fell short of what’s needed to spur lending and avert a recession. The central bank also pared the discount rate by a quarter point to 4.75%, counter to speculation among investors that the Fed would make a deeper reduction.

“Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation,” the Federal Open Market Committee said in a statement after meeting yesterday in Washington. Lower borrowing costs “should help promote moderate growth over time.”

The Fed dropped language from its previous statement that risks of slower growth and faster inflation were “roughly” balanced. The economy is faltering after a third-quarter surge as house prices drop, consumer spending slows and banks tighten lending standards for even their best customers.

“If things deteriorate they will cut again,” a professor of international economics at Brandeis University in Waltham, Mass. and a former director of research at the New York Fed, Stephen Cecchetti, said. “If financial conditions don’t start to improve dramatically,” policy makers might have to cut before the next meeting, scheduled for January 29–30, he said.

The gap between the discount rate, which the Fed charges for direct loans, and the federal funds rate, the rate banks charge each other for overnight loans, remains half a point.

“Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending,” the FOMC said. “The committee will continue to assess the effects of financial and other developments in economic prospects and will act as needed to foster price stability and sustainable economic growth.”

The central bank also said some “inflation risks remain,” and probably was reluctant to reduce borrowing costs at all, the former director of the Fed’s Division of Monetary Affairs and now a resident scholar at the American Enterprise Institute in Washington, Vincent Reinhart, said.

Yesterday’s decision, which matches the median forecast of economists surveyed by Bloomberg News, wasn’t unanimous. The president of the Boston Fed, Eric Rosengren, voted in favor of a half point cut.

Mr. Rosengren has a background in banking, having formerly headed the Boston Fed’s banking supervision department. His research focused on financial crises including New England’s credit crunch in the early 1990s and Japan’s bad-loan debacle.

The Dow Jones Industrial Average slumped 2.1% to 13,432.77, while the yield on the two-year Treasury note declined about 25 basis points to 2.92% at 4:33 p.m. in New York.


The New York Sun

© 2025 The New York Sun Company, LLC. All rights reserved.

Use of this site constitutes acceptance of our Terms of Use and Privacy Policy. The material on this site is protected by copyright law and may not be reproduced, distributed, transmitted, cached or otherwise used.

The New York Sun

Sign in or  Create a free account

or
By continuing you agree to our Privacy Policy and Terms of Use