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Fed cuts interest rate to 4.75% | |
(about 1 hour later) | |
US interest rate-setters have decided to cut rates for the first time since mid-2006, from 5.25% to 4.75%, more than had been expected. | |
Analysts had expected the Federal Reserve to cut rates to prevent a housing market downturn and the"credit crunch" from denting the economy. | |
By making money cheaper to borrow, people can spend and invest more, revitalising the economy, they say. | |
Some wanted the Fed to leave rates on hold to focus on controlling inflation. | |
A reduction in rates by 25 or even 50 basis points would fuel inflation and lead to the "cheap money" conditions that have brought boom-and-bust to the property sector, they argue. | A reduction in rates by 25 or even 50 basis points would fuel inflation and lead to the "cheap money" conditions that have brought boom-and-bust to the property sector, they argue. |
Inflation figures | Inflation figures |
But there was better news for those concerned about inflation with the Producer Prices Index (PPI) for August showing a bigger than expected fall. | But there was better news for those concerned about inflation with the Producer Prices Index (PPI) for August showing a bigger than expected fall. |
The Bureau of Labor Statistics said that the measure of the prices paid to producers of goods and services in the US fell by 1.4%, which was the biggest fall since October 2006. | The Bureau of Labor Statistics said that the measure of the prices paid to producers of goods and services in the US fell by 1.4%, which was the biggest fall since October 2006. |
"The August PPI was good news," said Gary Thayer, chief economist at AG Edwards and Sons in St. Louis. | "The August PPI was good news," said Gary Thayer, chief economist at AG Edwards and Sons in St. Louis. |
"There was a decline in energy prices that helped pull the overall index down and core inflation looks relatively modest," he added. | "There was a decline in energy prices that helped pull the overall index down and core inflation looks relatively modest," he added. |
'Won't deliver' | 'Won't deliver' |
By cutting rates the Fed would be boosting the US economy by making it cheaper to borrow money Q&A: US interest rate decision | |
The Fed made its announcement after its one-day policy meeting. | |
It has coincided with the imminent release of third-quarter results from a string of investment banks. | |
The first of those results, from Lehman Brothers, came in better than expected, suggesting the banks have not been hit as hard as had been thought. | |
The Fed started raising rates from their historic low of 1% back in June 2004 to put the brakes on a US economy that was showing signs of overheating. | The Fed started raising rates from their historic low of 1% back in June 2004 to put the brakes on a US economy that was showing signs of overheating. |
They had been on hold at 5.25% since mid-2006 after 17 consecutive rises. | |
Have you been affected by the sub-prime mortgage crisis? |