| |
WASHINGTON : The Federal Reserve slashed key interest rates three-quarters of a point on Tuesday, lowering the federal funds rate to 2.25 percent, as part of an effort to fight a mushrooming credit crisis.
The central bank also trimmed its discount rate for direct loans to banks, and now available to some securities firms, by a similar amount, bringing the rate to 2.50 percent. The vote was 8-2 by the Federal Open Market Committee.
The moves marked the latest effort by the Fed headed by chairman Ben Bernanke to revive a sluggish US economy and fight a global credit crunch that threatens to freeze the banking system.
"If they are reacting to the economy, this action makes sense because it seems the economy is heading south in a hurry," said Robert MacIntosh, economist at Eaton Vance.
"They are trying," he said of Fed members. "Hopefully it'll work but there's no guarantee."
The FOMC statement indicated that the Fed is ready to act further if needed to help stabilise a fragile economy.
"Recent information indicates that the outlook for economic activity has weakened further," the statement said.
"Growth in consumer spending has slowed and labour markets have softened. 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 statement said the actions combined with other moves to boost liquidity, "should help to promote moderate growth over time and to mitigate the risks to economic activity."
It added, "However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability."
Battling the economic downturn and a credit crunch among banks, the Fed has now slashed its federal funds rate by 300 basis points from 5.25 percent last September, in an effort to ease housing and credit market stress.
The Fed is reacting to economic and market turmoil stemming from the meltdown in the US sub-prime real estate sector, based on loans to people with poor credit.
The massive amounts of cash pumped into sub-prime loans by banks and securities firms worldwide have left those firms exposed to huge losses, and resulted in the spectacular demise last week of Wall Street giant Bear Stearns, which was bought by JPMorgan Chase with help from the Fed for a bargain-basement price of two dollars a share.
Yet some argue the Fed cannot alleviate the crisis on its own and may be sparking inflation and a potential new asset bubble by cutting rates aggressively.
Cary Leahey, economist at Decision Economics, said some market participants were disappointed that the cut was not the 100 basis points many had expected. He said the two dissents also signalled a lack of consensus.
"The Fed was worried more about inflation than I thought they would have," Leahey said.
But because the cut was not as deep as expected, "the Fed may have to go back to the well sooner than they had hoped."
Leahey said the traders see "a risk of market meltdown and a risk of recession and those a big risks. There is also a risk of inflation and that's an itty bitty risk as far as the market is concerned."
He added: "Given how fragile expectations are the Fed might have done better to give the market want it wanted." - AFP/de
|
