NEW YORK - The Federal Reserve hinted Wednesday in minutes from its latest meeting that more interest rate cuts might be needed if the deterioration in the credit markets leads to deeper problems for the housing sector and overall economy.
But the news from the Fed on Wednesday did little to soothe Wall Street, which kicked off 2008 more concerned about a recession and rising inflation. The Dow fell more than 220 points, or 1.7 percent, while the S&P 500 and Nasdaq fell 1.4 percent and 1.6 percent, respectively.
The central bank lowered its key federal funds rate - an overnight bank lending rate that affects how much consumers pay for credit cards, home equity lines, auto loans and other forms of credit - by a quarter of a percentage point on Dec. 11 to 4.25 percent.
That marked the Fed's third consecutive rate cut since September as the central bank attempts to deal with the subprime mortgage meltdown, which has caused cash-strapped consumers to default on their loans and banks to report billions of dollars in losses tied to bets on bad mortgages.
In the minutes, the Fed said that "some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit" and added that "such an adverse development could require a substantial further easing of policy."
Read the Fed minutes
As such, traders are now betting that a rate cut at the Fed's next meeting, a two-day session that concludes on Jan. 30, is certain. The question is simply how big of a cut it will be.
According to futures listed on the Chicago Board of Trade, investors are pricing in a 100 percent chance that the Fed will lower the federal funds rate by another quarter-point to 4 percent and a 63 percent chance that the central bank will lower rates a half-point to 3.75 percent.
One economist said there is a growing sense that even continued rate cuts won't cure what's ailing the market.
"I'm not sure if we can judge that it's too little too late, but what is clear is that there are more things to be nervous about, such as more writedowns from banks and weak holiday sales," said Tom Higgins, chief economist with Payden & Rygel, a Los Angeles-based money management firm.
"People are factoring in a higher risk of recession and that's weighing on the market, even with expectations that the Fed will be accommodative," Higgins added.
But the news from the Fed on Wednesday did little to soothe Wall Street, which kicked off 2008 more concerned about a recession and rising inflation. The Dow fell more than 220 points, or 1.7 percent, while the S&P 500 and Nasdaq fell 1.4 percent and 1.6 percent, respectively.
The central bank lowered its key federal funds rate - an overnight bank lending rate that affects how much consumers pay for credit cards, home equity lines, auto loans and other forms of credit - by a quarter of a percentage point on Dec. 11 to 4.25 percent.
That marked the Fed's third consecutive rate cut since September as the central bank attempts to deal with the subprime mortgage meltdown, which has caused cash-strapped consumers to default on their loans and banks to report billions of dollars in losses tied to bets on bad mortgages.
In the minutes, the Fed said that "some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit" and added that "such an adverse development could require a substantial further easing of policy."
Read the Fed minutes
As such, traders are now betting that a rate cut at the Fed's next meeting, a two-day session that concludes on Jan. 30, is certain. The question is simply how big of a cut it will be.
According to futures listed on the Chicago Board of Trade, investors are pricing in a 100 percent chance that the Fed will lower the federal funds rate by another quarter-point to 4 percent and a 63 percent chance that the central bank will lower rates a half-point to 3.75 percent.
One economist said there is a growing sense that even continued rate cuts won't cure what's ailing the market."I'm not sure if we can judge that it's too little too late, but what is clear is that there are more things to be nervous about, such as more writedowns from banks and weak holiday sales," said Tom Higgins, chief economist with Payden & Rygel, a Los Angeles-based money management firm.
"People are factoring in a higher risk of recession and that's weighing on the market, even with expectations that the Fed will be accommodative," Higgins added.
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