MercoPress. South Atlantic News Agency

Fed cuts rate to 1%; deflation could become major threat

The United States Federal Reserve cut on Wednesday the key interest rate from 1.5% to 1% in a widely expected move with the purpose of promoting “a return to moderate economic growth”.

Earlier this month the Fed cut rates from 2% to 1.5% in an emergency move, which was co-ordinated with five other central banks. Interest rates have been slashed since September 2007, when the federal funds rate stood at 5.25%. The 1% level was last seen between June 2003 and June 2004. The move is confirmation that inflation is no longer seen as the major threat to the US economy. "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" said the official release from the Federal Open Market Committee. However some analysts fear that deflation could be a risk to the economy, as consumers delay any spending they can in the hope that products will be cheaper in the future. But the Fed hopes its action will help get credit flowing and "should help over time to improve credit conditions and promote a return to moderate economic growth". Cutting rates to such a low level also means the central bank is running out of interest rates that it can use as a tool to stimulus in the future. "The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures" points out FOMC adding that "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. 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". FOMC also points out in the release to the concerted action of central banks to strengthen financial systems. "Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, 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 Fed decision after two days deliberation under Chairman Ben Bernanke was unanimous. The move follows the latest set of data on factory goods orders from the Commerce Department. Orders for long-lasting items manufactured in US factories were unexpectedly strong in September, rising 0.8%, following the 5.5% fall in August. Demand for commercial aircraft grew 29.7% while orders for motor vehicles rose 3%. Excluding transportation, orders were down 1.1% in September. Earlier in the week it was reported US consumer confidence had fallen to a record low in October. The Conference Board said the monthly consumer confidence index fell to 38, down from a revised 61.4 in September and below analysts' expectations of 52. It is the lowest since the board began tracking consumer sentiment in 1967. The survey of 5,000 US households is a gauge of consumer spending - which makes up two-thirds of the US economy.China's central bank also announced a rate cut on Wednesday, effective Thursday, from 6.93% to 6.66%, the third reduction in six weeks. Interest on bank deposits has also been moderated from 3.87% to 3.6%. As happened at the beginning of the month, the European Central Bank and the Bank of England are also forecasted to lower interest rates.