By Stephen Cecchetti

Tuesday morning’s sudden interest rate cut by the Federal Reserve’s Open Market Committee came as a shock even to those of us who live and breathe this sort of thing. The 75 basis point reduction to 3.5 per cent in the committee’s target for the overnight interbank lending rate was the largest single day move since the Fed adopted its current procedures in 1982. Not only was the action unprecedented in size, it was taken following a quickly organised conference call during the evening of a national holiday.

The immediacy of the cut has its genesis in both the deterioration of macroeconomic conditions over the week ending last Friday, combined with the equity market collapse, and the possible desire of chairman Ben Bernanke and his colleagues to change the committee’s modus operandi.

Up until this week, all of the Fed’s actions – both the more and less conventional – have been directed at keeping debt markets working. Starting with Mr Bernanke’s speech on January 10, 2008 it is clear that policymakers felt they had failed to keep the financial crisis from influencing the real economy. With global stock markets in freefall the need for immediate action became apparent. The Fed was planning to cut rates in 10 days anyway so why not bring the action forward to soothe markets and avoid a meltdown? While the inter-meeting action does not signal an emergency, it does confirm the plan for a dramatic easing.

The remainder of this column can be read here. Debate from our panel of economists appears below.

January 24, 2008 4:17pm in Uncategorized | Comment