Credit

BREAKING NEWS: Fed Cuts Rates Another 50 Basis Points

The Fed Funds target is now at its lowest level in seven years.
Ed ZwirnMay 15, 2001

The Federal Reserve cut interest rates by half a percentage point, bringing the federal funds target rate on overnight bank lending to 4.0 percent, its lowest level in seven years.

The discount rate was also lowered by half a percentage point, to 3.5 percent

The statement accompanying the rate cut announcement appears to leave room for further cuts.

Citing an “erosion in current and prospective profitability” and the “risk of slower growth abroad,” the FOMC statement said that “the risks [to the economy] are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.”

Today’s action is the fifth rate cut passed by the Federal Open Market Committee so far this year, beginning with the Jan. 3 inter-meeting 50 basis point reduction that took Wall Street by surprise and set off a pronounced rally in debt markets.

The FOMC action was also widely anticipated.

While a Labor Department release earlier this month showing a huge payroll decrease for April and a spike in unemployment left financial markets convinced that a 50-basis point rate cut this time around was a certainty, more recent releases last week showing stronger-than- expected retail sales and consumer confidence threw doubt on today’s outcome.

The immediate upshot, a sharp rise in Treasury yields, has left corporate bond spreads at their lowest level in six months, with corporate paper largely holding its own in the face of the same interest rate uncertainty hurting Treasurys.

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