WASHINGTON (Reuters) – The Federal Reserve slashed a key U.S. interest rateby three-quarters of a percentage point on Tuesday, a substantial cut butsmaller than many in financial markets had expected, as part of an effort tohold off a deep recession and financial meltdown.
The Fed’s action, taken on an 8-2 vote of its policy committee, took thebellwether federal funds rate down to 2.25 percent, the lowest since February2005. Financial markets had largely priced in a full point reduction.
"Financial markets remain under considerable stress, and the tightening ofcredit conditions and the deepening of the housing contraction are likely toweigh on economic growth over the next few quarters," the central bank said in astatement outlining its decision.
The Fed also said downside risks to economic growth remained even in the wakeof the rate cut, suggesting an openness to a further lowering of borrowing costsif needed.
However, two Fed officials dissented, preferring less-aggressive action.Still, most policy-makers seemed to be counting on inflation to subside, partlybecause they expect unemployment to rise.
"The committee expects inflation to moderate in coming quarters, reflecting aprojected leveling out of energy and other commodity prices and an easing ofpressures on resource utilization," the Fed said.
U.S. stock markets trimmed earlier gains on the smaller-than-expected ratecut, but were still up sharply. Prices for short-term government debt extendedlosses and the dollar pared earlier gains against the Japanese yen.
"The Fed has shown that they are focused on getting the economy back on itsfeet first and foremost, and they will worry about inflation later," said K.Daniel Libby, senior portfolio manager at Sands Brothers Select Access Fund inGreenwich, Connecticut.
CREDIT CONCERNS
The action comes two days after the central bank announced the latest in aseries of emergency measures to stem a fast-spreading global financialcrisis.
The Fed has now cut rates by 3 percentage points since mid-September,including 2 points since the start of the year. In recent days, the central bankhas also unveiled steps not used since the Great Depression to ensure financialinstitutions have access to liquid funds.
The central bank is pulling out all the stops to provide liquidity tofinancial markets and put a floor under an economy many analysts believe is inrecession.
A spike in mortgage delinquencies has escalated since the summer to afull-blown credit crunch that claimed venerable Wall Street institution BearStearns as its most prominent victim.
The Fed, fearing financial markets would freeze up and send the economy intoan sharp downward spiral, has offered cash auctions and direct loans tofinancial institutions, opening those liquidity avenues beyond the banks thatnormally deal with the Fed to include other Wall Street firms.
In spite of a series of interest rate cuts and liquidity-providing measures,U.S. economic activity has decelerated sharply. Recent reports show a loss injobs, reduced factory output and a drop in retail sales.
The U.S. central bank has set aside lingering concerns on inflation arisingfrom a jump in oil prices, some of which is blamed on the continuingdeterioration of the dollar’s value.
The government has responded to the economy’s abrupt slowing with a fiscalstimulus package aimed at putting cash in consumers’ wallets. Lawmakers are alsopushing for measures that would revive the struggling U.S. housing market byproviding relief for homeowners who are delinquent in their mortgages and facingpossible foreclosure.
U.S. Treasury Secretary Henry Paulson earlier on Tuesday conceded the economywas in decline. "There’s no doubt that the American people know that the economyhas turned down sharply," he told NBC’s Today show.
(Additional reporting by David Lawder; Editing by Tim Ahmann)
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