Half-Point Cut by Fed; Is Bernanke Done?

Central bank lowers key rate to 1 percent. What's next?

By SHARE

The Federal Reserve on Wednesday cut the federal funds rate by a half percentage point in an effort to stimulate the embattled U.S. economy.

Bernanke and company have now slashed the Fed's benchmark interest rate to 1 percent from 5.25 percent last September.

From the statement accompanying the release:

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

So what's next?

I talked to a couple of observers about that immediately after the announcement. But I though former Fed governor Lyle Gramley made the most sense:

I'll put it to you this way: We've seen some thawing in credit markets—the interbank lending markets—and if that continues that will be a very good sign and this will probably be the [last rate cut]. If we don't see signs of [credit improvement] between now and the December meeting, then I think the Fed will cut another 50 basis points—because the numbers that are going to come in between now and then on the economy are going to look pretty ugly.