MercoPress. South Atlantic News Agency

Fearing a slowdown the Federal Reserve cut rates to 4.25%

As anticipated by markets and concerned with slower economic growth and softer business and consumer spending the United States Federal Reserve cut on Tuesday the basic interest rate 25 points to 4.25%.

It is the third rate cut in the US in as many months, leaving US rates 1% lower than their August peak. On 18 September, the central bank cut interest rates from 5.25% to 4.75%. A second reduction followed on November first to 4.5%. "Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks" said the release from the Federal Open Market Committee adding that Tuesday's action "combined with the policy actions taken earlier, should help promote moderate growth over time". Following November's cut Federal Reserve Chairman Ben Bernanke sounded an upbeat note on the health of the US economy suggesting that the greater risks came from inflationary pressures due to higher energy and food prices. But with no sign of recovery in the housing market since then and the banking system still not functioning under normal conditions, many analysts say that the Fed must now prepare for a sharp downturn. The FOMC release points out that recent development including the deterioration in financial market conditions, "have increased the uncertainty surrounding the outlook for economic growth and inflation". Therefore the Committee 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". "Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put 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; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points. On Monday the Federal Reserve announced it would redeem 5 billion US dollars of its US Treasury bill holdings for cash on Thursday to give it more liquidity for interventions in the financial market. 'The action is designed "to give the Federal Reserve Open Market Trading Desk greater flexibility in the day-to-day management of reserves levels" the Fed said in a statement. It said it would continue to evaluate possible further T-bill redemptions, reverse repurchase agreements and sales of Treasury bills. By not rolling over its T-bills when they mature, the Fed is actually draining money from the financial system. Last week the United Kingdom trimmed rates by 0.25% leaving the basic rate at 5.5%. However on the same day the European Central Bank decided to keep Euro zone rates on hold at 4%.