US Fed cuts key interest rate by a quarter percentage point

US Fed cuts key interest rate by a quarter percentage point
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First Published: Thu, May 01 2008. 12 43 AM IST
Updated: Thu, May 01 2008. 12 43 AM IST
Washington: In what may be the last of a series of cuts aimed at aiding the ailing US economy combat a deep housing slump, credit market turmoil and the threat of a recession, the US Federal Reserve on Wednesday lowered a key US interest rate by a modest quarter percentage point.
The Fed action, announced after a two-day regular meeting, pushed the bellweather federal funds rate down to 2%, its lowest level since late 2004. It was the seventh reduction in a campaign that has brought rates down by 3.25% points since mid-September.
The rate cut will mean lower borrowing costs throughout the economy as banks reduce their prime lending rate, the benchmark for millions of consumer and business loans.
The Fed move was in line with expectations. Wall Street believes this could well wrap up the Fed’s rate cuts unless the economy threatens to fall into a worse slump than currently expected. The Fed said it stood ready to “act as needed to promote sustainable economic growth and stability.” That phrase was seen as a signal that the Fed is as worried about weak growth as it is about the risk of higher inflation. The Fed devoted portions of its statement to both the threats of weakness and the threats that inflation could pose, likely reflecting the debate inside the central bank.
In addition to rate cuts, the Fed has taken a number of emergency steps to ease credit strains that have threatened to make the economy’s ills worse, pumping billions of dollars into markets to keep them from choking on mortgage-related bets.
At their meeting on Wednesday, Fed officials discussed a new measure -- paying interest on commercial bank reserves held at the central bank -- that could improve their ability to provide liquid funds to the market.
The Fed has also mulled whether expanding the size of its term auction facility cash auctions for banks and extending the duration of those loans beyond 28 days could help ease still-tight credit conditions.
Chairman Ben Bernanke told Congress on April 2 that “recession is possible,” adding that the Fed believed there might be a “slight contraction” in the economy in the first six months of the year.
Consumer spending, which accounts for two-thirds of US output, grew at the slowest pace since 2001, business investment fell and homebuilding continued to nosedive, recording the biggest drop in 26 years.
At the same time, with gasoline prices heading toward $4 dollars a gallon and strong global demand pushing up food prices, some Fed officials have worried that a desire to bolster the economy could divert the central bank’s attention from inflation pressures.
President George W Bush on Tuesday said the US economy faced a “tough time,” a point underscored on Wednesday by a report that showed US gross domestic product expanded at a slim 0.6% annual rate in the first quarter.
While the growth rate was a bit stronger than economists had expected, it reflected a buildup in inventories that may weigh on the economy in coming months.
Other details in the report were decidedly weak.
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First Published: Thu, May 01 2008. 12 43 AM IST