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Fed cuts rate to 3%, but negative US data softens impact

Wednesday, January 30th 2008 - 20:00 UTC
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The Federal Reserve has cut interest rates for the second time in nine days in a further attempt to keep the United States economy from entering a recession. However a barrage of negative data on US growth, housing and employment seems to have watered the reaction from markets.

The latest cut was 0.5 percentage point, from 3.5% to 3%. Last week the Fed slashed the cost of borrowing by 0.75 percentage point from 4.25% to 3.5%, the largest amount in 25 years which was targeted to calm tumbling global stock markets. The announcement was made Wednesday afternoon following a two days meeting of the Federal Open Market Committee, FOMC. "Financial markets remain under considerable stress, and credit has tightened further for some businesses and households", said the release from FOMC. "Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets". The release added that "today's policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks". FOMC also mentioned that it expects inflation to moderate in coming quarters, "but it will be necessary to continue to monitor inflation developments carefully". Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting. Data released earlier by the US Department of Commerce showed weak economic growth in the final three months of 2007 as the housing market slump deepened and consumer spending cooled. Growth slowed to an annual rate of 0.6% between October and December, --half the rate forecasted-- compared with a brisk 4.9% growth rate in the previous three months. Overall growth in 2007 was 2.2% the slowest since 2002. Many economists are forecasting the US economy will enter a recession this year as turmoil in housing and financial markets begins to hurt ordinary households. This week, new data showed that US house prices were falling at their fastest rate since the 1930s, while foreclosures (repossessions) in 2007 topped two million after many sub-prime mortgages went down. A 146 billion US dollars economic stimulus package has been proposed by President George W Bush in an attempt to ward off a recession and this week was passed by the House of Representatives, but it could face an uphill debate in the US Senate. The measures include rebates for people with lower incomes as well as tax incentives for businesses.

Categories: Economy, United States.

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