MercoPress. South Atlantic News Agency

Fed cuts interest rate to 4.5% but admits risks to inflation

The United States Federal Reserve by a clear majority voted on Wednesday to cut US interest rates 25 basis points from 4.75% to 4.5%. The widely expected decision was taken to help revive the country's faltering housing and credit markets.

The Federal Open Market Committee release states that "today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time". In September, policy makers at the Fed voted unanimously to cut US interest rates from 5.25% - a level where they had sat since mid-2006 - to 4.75%. The Fed's bold intervention in financial markets was designed to restore confidence in the US housing market, which has badly suffered from the repercussions of two years of interest rate rises from 2004 to 2006. These rises have been reflected in the rate at which mortgages are set and had hurt particularly those with poor credit ratings or on low incomes, who had been sold sub prime home loans when borrowing costs were cheap. A US Congressional committee report said last week that up to two million US families - especially those considered risky lenders - could eventually lose their homes as borrowing cost rises filter through and lenders become more choosy as to who they lend to. However, the FOMC also cautioned about risks to inflation and said that after "this action the upside risks to inflation roughly balance the downside risks to growth", adding that the FOMC "will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth". The release points out that "economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time". "Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully". Voting for the FOMC monetary policy action were Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric S. Rosengren and Kevin M. Warsh and voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.