NewsFlashUS Fed lowers key rate by 75 bp

18 March 2008 18:35  [Source: ICIS news]

HOUSTON (ICIS news)--The Federal Reserve (Fed) lowered on Tuesday the key federal-funds rate by 75 basis points, in a move much anticipated by the market.

The drop will bring the rate to 2.25%.

"Recent information indicates that the outlook for economic activity has weakened further," the Fed said in a statement.

"Growth in consumer spending has slowed and labour markets have softened," according to the statement. "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."

While inflation has risen, the Fed expects that it will moderate in the upcoming quarters, due to a levelling off of energy and commodity prices. 

The Federal Reserve - the US central bank - has attempted to restore liquidity in the US credit markets, which froze up as a result of increasing subprime defaults. The credit tightening that had started in a subset of the US housing market has since spread throughout the broader economy, disrupting financing for chemical projects, bankruptcy reorganisation and mergers and acquisitions (M&A).

Frozen credit markets are one of three factors that are dragging down the US economy, according to the Manufacturers Alliance. The nation's economy is also contending with record oil prices and a sluggish house market, each of which has caused recessions in the past.

While the lower rate is intended to loosen credit markets, its most likely effect will be to lower the value of the US dollar against several foreign currencies, said Kevin Swift, chief economist of the American Chemistry Council (ACC). A weaker dollar will make US exports more competitive in world markets, however.

By: Al Greenwood
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