For the first time since June 2003
Economic uncertainty caused by turbulence in the financial markets in the United States led the Federal Reserve to lower interest rates for the first time since June 2003.
In its statement early last week, the Federal Open Market Committee noted that "inflation indicators have improved modestly this year." The statement also indicated a loosening of monetary policy, lowering the benchmark interest rate on short-term loans from 5,25% to 4,75%. The Fed's intention is "to contain some of the adverse effects on the rest of the economy that might otherwise arise from turbulence in the financial markets," the document states.
The move delighted speculators, who had been struggling with an inflexible monetary policy since June 2006, and immediately after the Federal Reserve's announcement, the Dow Jones Industrial Average jumped 200 points. The same occurred with the world's major stock exchanges shortly thereafter. From the political sphere, Democrat John Spratt, chairman of the House Budget Committee, said that "the decision recognizes the need to counteract instability."
The subprime mortgage crisis, which worsened in July, has paradoxically resulted from the real estate speculation frenzy fueled especially since 2003 by the Federal Reserve's monetary policy, which drove interest rates to 1%. Banks and mortgage firms granted loans to buyers with poor credit, structured with alternating fixed and variable interest rates.
In June 2004, the Federal Reserve began tightening its monetary policy with quarter-percentage-point increases in the interbank interest rate, until two years later it reached 5,25%. The housing bubble began to burst in 2006.
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