Markets quake here and abroad as the subprime meltdown plays its hand. Wall Street is up and down, sharply. The Federal Reserve Bank”™s move to cut its short-term interest rate on Sept. 18 was perhaps generous, but it came as no surprise. The question is, will making money half-a-point cheaper help ”“ or should New Yorkers be recession-ready?
The preferred short-term interest rate had been 5.25 percent; it is now 4.75 percent.
While financial markets rallied after the announcement,
economic experts expounded on the Fed rate cut on every media channel available to them, with most seeing it as an effort to rescue the economy from a looming recession. Only time will tell if the Fed”™s decision will have the desired effect ”“ stabilize financial markets both here and abroad and put a plug in the plunging housing market stateside, which has caused foreign markets to rattle in the wind with it.
With more than 1 million American homes in foreclosure and another 2 million mortgages ready to “reset” in 2008, even the rate cut may not forestall a feared recession. Despite a net job loss in August, the first in four years, some economists remain hopeful the rate cut will help shore up the sagging economy.
But what do local lenders think of the move?
“The Hudson Valley is in pretty good shape, considering what is going on in the rest of the state and country,” said Jeff Golda, a commercial lender with Provident Bank”™s Montebello headquarters, after hearing the rate-cut news that day. “Unlike its August cut, this is the more important indicator. This cut is more critical to the small-business owners; they are the ones impacted by it.”
While inflation may be in check, increases in volatile areas will determine what impact the short-term cut will have on the economy. With gas prices back on the rise and heating season just around the corner, the cost of oil hit $81 a barrel the day the Federal Reserve made the announcement. By historic accounts, that alone is a significant indicator of an economy heading inexorably toward recession range.
It wasn”™t a question of if, but how much, the Fed would cut the rate. In a prepared statement, it said “the tightening of credit condition has the potential to intensify the housing correction,” Fed-speak for things could get worse before they get better. So the cut is “intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in the financial markets and to promote moderate growth over time.”
The Fed had previously cut its discount rate, which banks pay to borrow directly from the Federal Reserve, by half a percentage point, to 5.25 per cent, in August.
While Fed Chairman Ben Bernanke ponders the ultimate outcome of the decision made last week, his predecessor, Alan Greenspan, has been making himself more than available to media outlets. Greenspan”™s prolific appearances coincide with the release of his highly acclaimed book, “The Age of Turbulence: Adventures in a New World.”
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Greenspan claimed not to realize the impact the subprime lending market would have on the nation”™s economy when he appeared on “60 Minutes” Sept. 16. “I knew of the practice,” said Greenspan, “but had no notion of how significant it had become” ”“ a remarkable confession from the man whom many held up as financial guru for the US economy for two decades. Greenspan did have praise for his successor, Ben Bernanke. Bernanke & Co. will need all the support they can get as the subprime tailspin continues.
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