The Federal Reserve Board cut its target for the federal funds rate by 25 basis points to 4.25% at its meeting today, December 11, 2007. It was the third consecutive rate reduction by the Fed, following on the heels of a 25 basis point cut at its last meeting in October. However, the stock market reacted negatively, as many on Wall Street were hoping for a larger rate cut. The Fed’s closely watched statement indicated “economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending.” It also stated, “strains in financial markets have increased in recent weeks.”
The Fed added, “some inflation risks remain and they will continue to monitor inflation developments carefully.” Some experts construe this to be a sign the central bank may be less willing to cut rates again at its next meeting in January.
Investors responded negatively, driving all major indices downward. The Dow Jones Industrial Average finished the day down 294.26 points (2.4%), the NASDAQ was down 66.60 points (2.45%), and the S&P 500 dropped 38.31 points (2.53%).
The federal funds rate is an overnight bank lending rate that affects rates on various types of loans such as variable-rate mortgages and credit card rates, among others. The rate may also impact rates on various investment and insurance products offered by life insurance companies.