US Fed cuts key rate by half a point

Second aggressive action in eight days signals more moves may be in store.

By
January 31, 2008 12:56
2 minute read.

The Federal Reserve on Wednesday cut a key interest rate for the second time in just over a week, reducing the federal funds rate by a half point. It signaled that further rate cuts were possible. The Fed action pushed the funds rate to 3 percent. It followed a three-fourths of a percentage point cut on January. 22, a day after financial markets around the world had plummeted on fears that the US economy was heading into a recession. That decrease had been the biggest one-day move in more than two decades. The half-point cut Wednesday followed news that the economy had slowed significantly in the final three months of last year with the gross domestic product expanding at a barely discernible pace of 0.6%, less than half what had been expected. The report came amid increased concern from several quarters about a possible recession. In a brief statement explaining their decision, Federal Reserve Chairman Ben Bernanke and his colleagues said that "financial markets remain under considerable stress." The Fed move was approved on a 9 to 1 vote. Richard Fisher, president of the Fed's Dallas regional bank, dissented, preferring no change in rates. The rate cut marked the fifth time that the Fed has cut the funds rate since it started with a half-point cut on September 18 in response to the severe credit crisis that hit global markets in August. The latest Fed action was expected to be quickly followed by cuts in banks' prime lending rate, the benchmark rate for millions of consumer and business loans. The Fed's hope is that by making credit cheaper, it will encourage more borrowing, giving the economy a needed boost. The Fed's half-point move met expectations of financial markets and was a bolder move than the smaller quarter-point cut that many economists had been expecting. In its statement, the Fed said that "downside risks to growth remain" and pledged to "act in a timely manner as needed to address those risks." That was seen as a pledge to cut rates further if the economy continues to weaken. On inflation, the Fed officials said they expected inflationary pressures to moderate in coming quarters, but they also pledged to monitor price developments closely. The GDP report showed that a key gauge of core inflation, which excludes energy and food, jumped at an annual rate of 2.7% in the final three months of last year, the fastest increase in a year and up sharply from a 2% increase in the July-September quarter.


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