The action of Bernacke hopefully will impact us all–borrowers, sellers and lenders. 

The Federal Reserve slashed the benchmark federal funds rate by a half-percentage point in a bold bid to buffer the economy from a housing slump and related financial market turbulence.The decision by the central bank’s Federal Open Market Committee took the overnight rate down to 4.75 percent, its lowest level since May of last year. It was the first cut in
the interbank rate — the Fed’s main tool to influence the economy — since June 2003 and the first half-point reduction since November 2002.Financial markets had widely expected the Fed to lower overnight borrowing costs, but were split over whether the move would be a quarter-point or more-aggressive half-point.In a related move, the Fed also lowered the discount rate it charges for direct loans to banks by a half-point to 5.25 percent.

J. Scott Applewhite / AP

The Fed weighed fresh data from Tuesday showing producer prices fell more than expected in August as energy prices dropped, while a core measure of inflation at the producer level rose slightly more than forecast.Fed Chairman Ben Bernanke said late last month the central bank stood ready to act as necessary to limit damage to the broader economy from the housing slump and turbulence in credit markets nervous about a wave of mortgage delinquencies.Bernanke’s remarks were seen as opening the door to lower rates, and a report on Aug. 7 showing the economy shed jobs in August for the first time in four years was seen as cementing the case for cutting overnight borrowing costs from their current 5.25% level.The only question seemed to be how large a reduction may be in store. Through last week, federal funds futures markets showed investors saw a somewhat greater probability of a
half-percentage point cut in the overnight fed funds rate than a quarter-point.However, futures dealers trimmed their bets of aggressive action this week. Implied chances of a half-percentage point rate cut slipped to 40 percent after the producer price data suggested inflationary forces may yet be a factor in the central bank’s thinking.“Core PPI is a mild disappointment and highlights the tough spot the Fed is in right now,” said John Miller,  head of fund management at Nuveen Investments in Chicago.Comments by Fed officials, even after the weak employment report showed housing-related woes taking a toll on the broader economy, suggested they hold differing views on the appropriate monetary tonic.San Francisco Federal Reserve Bank President Janet Yellen said there was evidence of “significant downward pressure” on the economy. In contrast, Dallas Fed President Richard Fisher said the economy “appeared to be weathering the storm thus far.”The last time the Fed lowered the bellwether federal funds rate was in June 2003, when it made the last of 13 reductions over two-and-a-half years that took borrowing costs to a
1958-matching low of 1 percent.Former Fed Chairman Alan Greenspan, in recent interviews as reported yesterday by me promoting his memoir, said Bernanke’s Fed faces more risks from inflation now than he did during that rate-cutting spree.“We could ease without fear of stoking inflationary pressures,” he told Reuters Monday. “We couldn’t do that in today’s environment.”The Fed has held the federal funds rate, its main tool for influencing the economy, steady since June of last year. However, in mid-August it lowered the discount rate that governs direct Fed loans to banks in an effort to unfreeze credit markets unsettled by mortgage defaults.A cut in overnight rates on Tuesday would mark a sharp shift for the U.S. central bank, which said after their last regularly scheduled meeting on Aug. 7 that inflation remained their predominant concern.

The Fed’s policy-setting panel, however, said on Aug. 17 that tighter credit conditions had “appreciably” raised the risk that the economy could stumble badly.

Let’s wait and see……

Denise