Fed cuts rate by 0.75%

In a surprise move, the Federal Reserve Board lowered the federal funds rate by 0.75% on Tuesday, in an attempt to revive a weakening economy. This marked the largest single-day cut to the federal funds rate since 1982. Financial markets remained volatile throughout the week, as investors digested the Fed's unexpected move. Otherwise, it was a light week for economic data releases. A report on existing-home sales confirmed what most people already knew: 2007 was a weak year in the housing market. For the week, the S&P 500 Index rose 0.4% to 1,331 (for a year-to-date total return of –9.6%), and the yield of the 10-year U.S. Treasury note fell 7 basis points to 3.58%.

Fed sends markets and economy a pick-me-up

The Federal Reserve Board's Open Market Committee (FOMC) cut the target for short-term rates by 0.75%, to 3.50%.  The FOMC's unscheduled action on Tuesday morning came amid growing fears of a recession and followed steep declines in many foreign stock markets on Monday. U.S. markets were closed Monday in observance of Martin Luther King Day. This was the first time the FOMC has made an unscheduled rate cut since 2001, following the attacks of September 11, and it was the largest rate move since 1994, when the FOMC raised rates by 0.75%. 

In its accompanying statement, the Committee voiced concerns about continued downside risks to growth and noted "broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households."  The rate cut came a week ahead of the FOMC's regularly scheduled two-day meeting, set for January 29 and 30. This week's rate cut does not preclude further action next week.

Housing weakness continued in December  

Existing-home sales fell 2.2% in December, capping one of the worst years on record for the housing market. Sales were down 22.0% from their year-ago levels, and for all of 2007, existing-home sales were 12.8% below the 2006 pace. The median price for an existing home fell to $208,400 in December, down from $221,600 one year ago.  For the month, price declines were steepest in the West, where median home prices are highest.

The economic week ahead

Next week will be a busy one for economic data releases, but the Federal Reserve Board will again take the spotlight. The investment community will be watching to see if the FOMC lowers rates again at their regularly scheduled meeting on Wednesday. Other data slated for release include reports on new-home sales (Monday), durable goods (Tuesday), consumer confidence (Tuesday), gross domestic product (Wednesday), employment costs (Thursday), personal income (Thursday), unemployment (Friday), construction spending (Friday), and the manufacturing segment of the economy (Friday).