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Alan Greenspan in 1998
chairman of the Federal Reserve, has been frequently in the news during a year marked by a heavily weakened global economy. The Fed lowered interest rates twice in October,1998 in a move to promote economic activity and protect the U.S. from financial disaster.
The FOMC actually cut the Federal funds rate three times in the fall of 1998, during an economic boom in the United States. The first of these cuts, in the September 1998, came to be called "the 25 basis points that saved the world." notice that the phrase was "saved the world," not saved the United States."[1]
Looking the chart of September and October in 1998, you see how market react to Fed rate cut three times in two months.
The Fed has made just four emergency rate cuts since 1994: in October 1998 and in January, April and September of 2001.
The April 2001 cut came in the middle of an eight-week gap between one Federal Open Market Committee meeting and the next, at a time the U.S. economy seemed to be deteriorating rapidly.
"This can be an eternity when the economy is losing steam," said Ed McKelvey, economist at Goldman Sachs in New York.
This credit spread rose from 469 basis points in the last week of August 1998 to 661 basis points in the week ended October 16. The Fed lowered the federal funds rate 25 bps to 5.25% on September 29, 1998 at the regularly scheduled FOMC meeting citing that "the action was taken to cushion the effects on prospective economic growth in the United States of increasing weakness in foreign economies and of less accommodative financial conditions domestically." The Fed cut the federal funds rate once again on October 15, 1998, an unscheduled event, to 5.00% indicating that "growing caution by lenders and unsettled conditions in financial markets more generally are likely to be restraining aggregate demand in the future.
Against this backdrop, further easing of the stance of monetary policy was judged to be warranted to sustain economic growth in the context of contained inflation." The Fed eased monetary policy conditions once more by cutting the federal funds rate another 25 bps cut to 4.75% at a scheduled FOMC meeting on November 17, 1998. The FOMC statement after this rate cut read as follows: "Although conditions in financial markets have settled down materially since mid-October, unusual strains remain. With the 75 basis point decline in the federal funds rate since September, financial conditions can reasonably be expected to be consistent with fostering sustained economic expansion while keeping inflationary pressures subdued." Following the 75 bps cut in the federal funds rate, the Fed held the funds rate unchanged until June 30, 1999, when it raised the federal funds rate to 5.00%. Of importance to note at this juncture is that the economy was growing at a robust clip with no imminent threat to economic growth
(see chart 2).
Long Term Capital Management (LTCM) was a hedge fund founded in 1994 by John Meriwether (the former vice-chairman and head of bond trading at Salomon Brothers). On its board of directors were Myron Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economics[1]. Initially enormously successful with annualized returns of over 40% in its first years, in 1998 it lost $4.6 billion in less than four months and became the most prominent example of the risk potential in the hedge fund industry. The fund folded in early 2000.
Three experts play hard ball here after The Federal Reserve Board votes to raise interest rates by a quarter point.
Three experts discuss how the change will play on Wall Street 1998.
http://www.pbs.org/newshour/bb/economy/july-dec99/fed_8-24.html
http://www.kc.frb.org/PUBLICAT/SYMPOS/2005/pdf/BlinderReis.paper.0804.pdf
Reference
[1] Understanding the Greenspan Standard
[2] http://www.marketoracle.co.uk/Article1818.html
