MercoPress. South Atlantic News Agency

Fed cuts rate to 2%; forecasts soft growth in next quarters

The United States Federal Reserve cut on Wednesday its key interest rate 25 points from 2.25% to 2% as it aims to avoid a possible US recession. It is the seventh rate cut since last September, when the rate was cut from 5.25% to 4.75% and in the range of what markets were expecting.

The official release from the US Central bank stated that economic activity remains weak, "household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters". The Fed decision coincided with the announcement that the US economy grew at an annual pace of 0.6% in the first quarter of 2008, slightly faster than expected and technically averting the word "recession" (two consecutive negative quarters). In the paragraph dedicated to inflation the Fed said that although readings on core inflation have improved somewhat, "energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months". The Federal Open Market Committee added that it expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization, but "uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully". Eight members of the FOMC committee, including chairman Ben Bernanke, voted for the rate cut, with two members voting for no change, Richard W. Fisher from Philadelphia and Charles I. Plosser, Dallas, Texas. As to future prospects for the economy, FOMC said that the substantial easing of monetary policy to date combined with ongoing measures to foster market liquidity, "should help to promote moderate growth over time and to mitigate risks to economic activity". However the Committee "will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability". The next scheduled Fed FOMC meeting is on June 24/25. By then the US government tax rebates scheme plus the stimulus plan should have started to reach consumers, and thus boosting consumer spending, the engine of the US economy. Many market analysts believe this will be the final interest rate cut this year, since there's a growing consensus that excess liquidity to combat the credit crunch is finding its way to the commodities markets. The oil cartel OPEC estimates that for every cent the US dollar falls, the barrel of oil jumps 4 US dollars. The fact that two of the FOMC eight members opted for no change in the rates could be indicating such a direction.