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US rates reduced for third time US rates reduced for third time
(about 1 hour later)
The US Federal Reserve has cut interest rates from 4.5% to 4.25% to help the world's largest economy weather a housing slump and severe credit woes. The US Federal Reserve has cut interest rates from 4.5% to 4.25% in a bid to help the world's largest economy through a housing and credit woes.
It is the third rate cut in the US in as many months, leaving US rates 1% lower than their August peak.It is the third rate cut in the US in as many months, leaving US rates 1% lower than their August peak.
The move had been widely expected by economists, many of whom believe more reductions may be necessary to keep the US economy from a recession. A downward move had been expected, but US shares fell because some traders had hoped for a more aggressive rate cut.
The UK has followed the same trend, trimming rates by 0.25% last week. The Fed also trimmed the rate at which it lends money to banks to help smooth out problems in the credit markets.
The Bank of England's rate now stands at 5.5%, although the European Central Bank decided on the same day to keep eurozone rates on hold at 4%. The Fed reduced its primary discount rate from 5% to 4.75% to encourage banks to borrow from it.
An increase in borrowing would in turn boost the amount of money in the financial system, making it easier for banks to borrow from each other.
Inter-bank lending charges have shot up recently amid suspicion over which banks are bearing undisclosed losses linked to investments in bad home loan debt.
The need to shore up capital reserves has also underpinned the credit freeze.
Double whammy
The Fed's twin actions are designed to prevent the US economy from slipping into a recession next year, which could have potentially damaging consequences for economic growth around the world.
The Dow Jones Industrial Average index fell 1.38% and was trading at 13,537 following the announcement, while the broader S&P 500 index and technology-dominated Nasdaq also fell heavily.
The interest rate cut also bolstered global oil prices, with energy traders betting that demand for oil would continue to be strong if US economic growth was not derailed.
New York sweet, light oil jumped more than $2 to trade past the $90 level, while Brent crude in London also surged up $1.90, to $89.94.
Downturn fearedDownturn feared
Comments accompanying the Fed's decision will be closely watched to gauge the future direction of monetary policy. The Fed warned that recent economic data indicated a slowdown in the US economy as a result of "the intensification of the housing correction and some softening in business and consumer spending".
After last month's meeting, Fed Chairman Ben Bernanke sounded an upbeat note on the health of the US economy, suggesting that the greater risks came from inflationary pressures due to higher energy and food prices. It added: "Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation."
But with no sign of recovery in the housing market since then and the banking system still not functioning under normal conditions, many analysts say that the Fed must now prepare for a sharp downturn. These sombre comments differ markedly from those made by Fed Chairman Ben Bernanke after last month's interest rate cut when he sounded a relatively upbeat note on the health of the US economy.
The Federal Reserve has cut rates twice already this year. Then it was suggested that the greater risks came from inflationary pressures due to higher energy and food prices.
On 18 September, the central bank cut interest rates from 5.25% to 4.75%. But with no sign of recovery in the housing market since then and the banking system still not functioning under normal conditions, analysts believe the Fed is now preparing for a sharp downturn with more interest rate cuts expected.
The reduction, the first in four years, was aimed at easing the pain in the housing market and limiting the impact of the credit crunch.
It lowered rates again on 1 November, reducing them to 4.5%.