Federal Reserve cuts interest rates to 2 percent

The Federal Reserve cut the Federal funds rate a quarter-point to 2 percent today, the lowest since 2004. The Fed indicated that its dramatic monetary easing the last 7 months was coming to an end. The Federal funds rate was 5.25% last September and has been lowered aggressively to offset the housing and credit crises and the economic downturn.

The Feds rate cuts and emergency actions have ameliorated the impact of the global credit crunch and helped to restore liquidity and confidence to the financial markets. The stock market is 9% above the low it established in March as investment bank Bear Stearns stock collapsed.

The Federal Reserve moved to a neutral outlook shifting to a less aggressive policy. They indicated there are still continued fears of a recession and the Fed could lower rates in the future. The low rates have fueled inflation causing record prices in food and energy and weakened the dollar against foreign currencies.

Prior to the rate announcement the Commerce Department announced that gross domestic product (GDP) grew 0.6% in the first quarter, the same amount that GDP grew in the fourth quarter of 2007. The last two quarters have shown extremely weak growth but and avoided the technical definition of a recession as two consecutive quarters of negative growth.

The Fed stated, “Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.” The Fed said it “expects inflation to moderate in coming quarters.”

The labor department said that employment compensation rose 0.7% in the first quarter, the smallest increase in two years. A separate report showed that consumer spending was growing at the slowest rate since 2001 as stagnant wages and lower home prices have people feeling less wealthy.