US Fed cuts rate to 1%, hints another cut possible

29 October 2008 19:03  [Source: ICIS news]

WASHINGTON (ICIS news)--The Federal Reserve Board on Wednesday dropped its key federal funds interest rate by 50 basis points to 1%, citing the continuing economic downturn in the US and abroad.

 

The US central bank’s rate-setting federal open markets committee (FOMC) said the rate cut was necessary because “The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures”.

 

In addition, said the committee, US commercial activity has weakened along with the decline in consumer spending, and there is less likelihood that US exports will be able to offset much of the domestic decline. 

 

“Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for US exports,” the committee said in its statement.

 

The situation, said the Fed, is likely to get worse before it gets better.

 

“Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit,” the central bank said.

The Fed’s board of governors said the rate reduction also was justified because the threat of inflation is low.

“In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the committee expects inflation to moderate in coming quarters to levels consistent with price stability,” the statement said.

The Fed said that its own recent policy actions combined with those taken by the US Treasury Department, Congress and foreign central banks “should help over time to improve credit conditions and promote a return to moderate economic growth”.

“Nevertheless,” the bank cautioned, “downside risks to growth remain.”

“The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability,” the statement said, suggesting that the Fed may be willing to cut the already miniscule interest rate still further.

($1 = €0.79)

 

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By: Joe Kamalick
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