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Economy

Federal Reserve in shock rate cut

Tuesday, 22 January 2008

The US Federal Reserve has cut the base rate of interest from 4.25 per cent to 3.5 per cent after billions were wiped off the value of shares in the past few days.

The US Federal Open Market Committee said it had decided to lower its target for the federal funds rate 75 basis points in view of a weakening of the economic outlook and increasing downside risks to growth.

"While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labour markets," according to the Fed.

The Committee said it expected inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

The Fed added that appreciable downside risks to growth remain. The Committee said it would continue to assess the effects of financial and other developments on economic prospects and would act "in a timely manner as needed" to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh.

Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.

The Fed's Board of Governors also approved a 75-basis-point decrease in the discount rate to 4 per cent, following requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis.

Analysts said that the Fed's surprise rate cut indicated panic over the threat of an all-out US recession.

The Fed's decision to cut interest rates will add further pressure on the Bank of England's Monetary Policy Committee, which is widely expected to cut the UK base interest rate by a quarter to a half per cent in February.

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