Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.

Recs

0

Fed Cuts Rates by Half-Point

The Federal Reserve's Open Market Committee announced a half-point cut in its target for the short-term federal funds rate, to 5%. While half-point cuts are generally seen as significant moves, today's is practically a cautious one compared to the speculation in recent days of a three-quarter point or even full-point cut.

In its news release, the Fed cited several factors behind its decision, including falling consumer confidence and business inventory buildup, noting that "Persistent pressures on profit margins are restraining investment spending and, through declines in equity wealth, consumption. The associated backup in inventories has induced a rapid response [i.e., a decline] in manufacturing output and, with spending having firmed a bit since last year, inventory adjustment appears to be well underway."

The Fed also stated that "Although current developments do not appear to have materially diminished the prospects for long-term growth in productivity, excess productive capacity has emerged recently. The possibility that this excess could continue for some time and the potential for weakness in global economic conditions suggest substantial risks that demand and production could remain soft." With that in mind, it's no surprise that the Fed maintained its bias toward cutting rates.

How does the Fed work?
As noted in our special on the Federal Reserve, the Fed does not actually directly control the short-term federal funds rate, which is the rate banks pay each other for loans to top off their required reserves. Instead, the Fed's decisions are actually changes to its target for the rate, and it nudges the rate up or down toward its target by either buying or selling government securities.

When buying government securities, the Fed creates reserves -- essentially, new money -- to pay for them, thereby increasing the supply of bank reserves, increasing money in the economy, and reducing the need for borrowing by member banks, which reduces the federal funds rate. When the Fed sells securities, it reduces reserves held by the banks of the purchasers of those securities. This makes it more likely that banks will engage in overnight borrowing, which then increases the federal funds rate.

For a more extensive explanation of how all this works, check out How the Fed Affects the Economy.

Chris Rugaber does not own shares of the Federal Reserve, nor does anyone else. The Motley Fool is investors writing for investors.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1146162, ~/Articles/ArticleHandler.aspx, 4/28/2017 2:28:09 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 5 hours ago Sponsored by:
Change up DOW 20981.3 6.2 0.0%
Change up S&P 500 2388.8 1.3 0.1%
Change up NASD 6048.9 23.7 0.4%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes