The Federal Reserve Board today slashed short-term interest rates by half a percentage point, while acknowledged the problem of excess inventory that manufacturers, including electronics OEMs and component suppliers, said savaged their fourth quarter results.
In a statement today, the Fed noted that factors such as high energy costs had sapped consumer purchasing power, which in turn resulted in poor retail sales and the inevitable slowdown in capital equipment spending by manufacturers.
"In response, manufacturing has been cut back sharply, with new technologies appearing to have accelerated the response of production and demand to potential excesses in the stock of inventories and capital equipment," said the Federal Open Market Committee, the Fed unit, which set borrowing rates, in a statement.
The Fed's statement today marked the first sign that economic regulators have become concerned about inventory overload at manufacturers across all industry segments. In the electronics industry, many of the companies reporting fourth quarter results noted that they faced pressure from OEM attempts to reduce finished goods and component inventory.
Today's moves brings the federal funds rate, the interest rate banks charge each other on overnight loans, to 5.5%, from 6%. while the discount rate, the rate the central bank charges commercial banks to borrow money on a short-term basis, was cut to 5%, from 5.5%.
With the rate cut, the Fed indicated a willingness to help lift sagging consumer confidence, which dropped to a 4-year low in January. Economists said the latest move will help release more money into the economy as house owners refinance their mortgages. The immediate impact of the rate cut, the second 0.5% cut in one month, will be to get people spending again and this will likely give the electronics industry a boost, according to Jim Haughey, EBN's staff economist.
"This is a confidence builder and it's going to get a lot of publicity," Haughey said. "Things are happening already with people rushing to refinance from the last interest rate cut. A one percentage point cut in one month is far more than the Fed has ever done before."
Despite today's action, the Reserve Bank also confirmed what industry executives had hinted at: the immediate future remains uncertain.
"The Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."