Yesterday the U.S. Federal Reserve cut interest rates to temporarily put a stop to plunging stock prices all over the globe.
The decision came as fears loomed about a possible recession in the U.S. and was the biggest one-day reduction on record. After a day of plummeting stocks on the global market, the stock prices began to recover by the end of the day yesterday.
Despite the interest rate cut, it was a nerve-racking day on Wall Street, with the Dow ending down 128 points, or about 1%, the New York Times reports. Even after the rebound, the major market indexes are down about 10% so far in January and even further off their recent highs in October. The Nasdaq composite index, which mostly reflects technology stocks, is off 18.3%.
Over time, sharply lower rates will help the US economy, the Financial Times reports. A steeper yield curve should feed through into better bank profits over time and allow them to rebuild capital. More immediately, lower rates will help reduce the payment shock from mortgage resets and bolster confidence in general.
But news outlets agree that this is not solution, and mainly a quick fix.
Economists say it remains far from clear if the U.S. will avoid a recession, either because the Fed and the Bush administration had moved too slowly or because the economy’s woes were too acute to solve quickly and painlessly, the NY Times says. “Broader financial market conditions have continued to deteriorate,” the central bank said, noting that credit conditions have continued to tighten for many businesses and households, that the housing market continues to spiral downward and that job creation has slowed, the New York Times reports.
The BBC reports that analysts say the European Central Bank hinted it would not follow suit, and the Bank of England was unlikely to accelerate rate cuts.