US cuts interest rates, oil hits new high

US cuts interest rates, oil hits new high

New York: The Federal Reserve slashed US interest rates by a hefty half-percentage point in a bold bid to shield the economy from a housing slump and financial turbulence.

The unanimous decision by the central bank’s policy-makers took the benchmark federal funds rate, which governs overnight loans between banks, down to 4.75%, its lowest since May of last year. The Fed also cut the discount rate it charges for direct loans to banks by a half-point to 5.25%.

As a result of the decision, oil surged to a peak over $82 a barrel on 18 September, the fifth record in as many trading days, as the decision to slash interest rates heightened concerns of a winter supply squeeze in the world’s top energy consumer.

The record rally in oil prices could lead OPEC nations to consider another hike to production, just a week after the cartel agreed to boost output by 5,00,000 barrels per day to sooth consumer fears of a crunch.

Today’s was the first cut in the federal funds rate — the Fed’s main tool to influence the economy — since June 2003 and the first half-point cut since November 2002.

Financial markets had widely expected the Fed to lower overnight borrowing costs, but were surprised by the aggressive half-point move, the first rate cut since Ben Bernanke took over as chairman of the central bank in February last year.

Stock prices surged as the decision gave investors hope the housing and credit turmoil wouldn’t drag the economy down. The blue chip Dow Jones industrial average was up nearly 300 points, or more than 2%, in late afternoon.

In a statement outlining its decision, the Fed said its move was a pre-emptive strike to neutralize the impact of market turmoil on the economy.

“Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time," it said.