U.S. Fed cuts key interest rate to 2%

22:19' 01/05/2008 (GMT+7)

The U.S. Federal Reserve decided Wednesday to cut a key interest rate by one quarter percentage point to 2.0 percent to prevent the economy from slipping into recession. Traders in the Eurodollar options pit of the Chicago Mercantile Exchange in Chicago, Illinois signal orders shortly after the Federal Open Market Committee lowered short-term interest rates March 18, 2008. The U.S. Federal Reserve decided Wednesday to cut a key interest rate by one quarter percentage point to 2.0 percent to prevent the economy from slipping into recession. The Wednesday action, the seventh straight move since Sept. 18,2007, could be the last one for a while as soaring energy and food prices heighten inflation concerns, according to analysts. As a result of the Fed actions in the past seven months, the federal funds rate, which commercial banks charge each other on overnight loans, have been cut by a combined 3.25 percentage points. The quarter-point rate cut would trigger a similar reduction in banks' prime lending rate, the benchmark for millions of consumer and business loans. That means borrowing costs for consumers and businesses would be lowered to 5 percent from 5.25 percent. The Fed action came hours after a government report showed that the U.S. economy grew at an annual rate of 0.6 percent in the first three months of this year, the same pace as in the previous quarter but slightly stronger than the 0.2 percent growth rate forecast by analysts. The growth paces in the past two quarter were far below the brisk 4.9 percent registered in the third quarter of last year. A growing number of economists believe the economy is in a recession and is indeed contracting now. On the other hand, however, inflationary pressures are rising. The government report also showed that core prices, which exclude volatile energy and food, rose at a rate of 2.2 percent in the first quarter. That was outside the Fed's comfort zone of one percent to 2 percent. Analysts say that the Fed is walking a tightrope. It is trying to shore up economic growth and at the same time it is mindful that it can not let inflation get out of hand. In a brief statement announcing the rate cut, the Fed said Wednesday that recent information indicates that "economic activity remains weak." Household and business spending has been subdued and labor markets have softened further, it said. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters. While saying the central bank expected inflation to moderate incoming months, the Fed noted that "uncertainty about the inflation outlook remains high." "It will be necessary to continue to monitor inflation developments carefully," it said. The Fed also expressed its hope that interest rate cuts to date, combined with other measures to foster market liquidity, can "help to promote moderate growth over time and to mitigate risks to economic activity." It will continue to monitor economic and financial developments and will "act as needed" to promote sustainable economic growth and price stability, the Fed said. In a related action, the Fed unanimously approved a quarter percentage point reduction in the discount rate, the interest rate that the central bank charges to make direct loans to banks, to 2.25 percent.