WASHINGTON (Reuters) - The Federal Reserve slashed a key U.S. interest rate
by three-quarters of a percentage point on Tuesday, a substantial cut but
smaller than many in financial markets had expected, as part of an effort to
hold off a deep recession and financial meltdown.
The Fed's action, taken on an 8-2 vote of its policy committee, took the
bellwether federal funds rate down to 2.25 percent, the lowest since February
2005. Financial markets had largely priced in a full point reduction.
"Financial markets remain under considerable stress, and the tightening of
credit conditions and the deepening of the housing contraction are likely to
weigh on economic growth over the next few quarters," the central bank said in a
statement outlining its decision.
The Fed also said downside risks to economic growth remained even in the wake
of the rate cut, suggesting an openness to a further lowering of borrowing costs
if needed.
However, two Fed officials dissented, preferring less-aggressive action.
Still, most policy-makers seemed to be counting on inflation to subside, partly
because they expect unemployment to rise.
"The committee expects inflation to moderate in coming quarters, reflecting a
projected leveling out of energy and other commodity prices and an easing of
pressures on resource utilization," the Fed said.
U.S. stock markets trimmed earlier gains on the smaller-than-expected rate
cut, but were still up sharply. Prices for short-term government debt extended
losses and the dollar pared earlier gains against the Japanese yen.
"The Fed has shown that they are focused on getting the economy back on its
feet first and foremost, and they will worry about inflation later," said K.
Daniel Libby, senior portfolio manager at Sands Brothers Select Access Fund in
Greenwich, Connecticut.
CREDIT CONCERNS
The action comes two days after the central bank announced the latest in a
series of emergency measures to stem a fast-spreading global financial
crisis.
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 bank
has also unveiled steps not used since the Great Depression to ensure financial
institutions have access to liquid funds.
The central bank is pulling out all the stops to provide liquidity to
financial markets and put a floor under an economy many analysts believe is in
recession.
A spike in mortgage delinquencies has escalated since the summer to a
full-blown credit crunch that claimed venerable Wall Street institution Bear
Stearns as its most prominent victim.
The Fed, fearing financial markets would freeze up and send the economy into
an sharp downward spiral, has offered cash auctions and direct loans to
financial institutions, opening those liquidity avenues beyond the banks that
normally 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 in
jobs, reduced factory output and a drop in retail sales.
The U.S. central bank has set aside lingering concerns on inflation arising
from a jump in oil prices, some of which is blamed on the continuing
deterioration of the dollar's value.
The government has responded to the economy's abrupt slowing with a fiscal
stimulus package aimed at putting cash in consumers' wallets. Lawmakers are also
pushing for measures that would revive the struggling U.S. housing market by
providing relief for homeowners who are delinquent in their mortgages and facing
possible foreclosure.
U.S. Treasury Secretary Henry Paulson earlier on Tuesday conceded the economy
was in decline. "There's no doubt that the American people know that the economy
has turned down sharply," he told NBC's Today show.
(Additional reporting by David Lawder; Editing by Tim Ahmann)
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