Fed cuts interest rate to 4.25 per cent

The Federal Reserve cut its benchmark interest rate by a quarter-point to 4

The Federal Reserve cut its benchmark interest rate by a quarter-point to 4.25 per cent in effort to prevent the housing slump and credit squeeze from undoing the six-year expansion.

"Recent developments, includ- ing the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation," the Federal Open Market Committee (FOMC) said after meeting yesterday in Washington. The change "should help promote moderate growth over time".

Stocks fell and Treasury notes advanced after the decision, which some economists said fell short of what is needed to spur lending and avert a recession. The central bank also pared the discount rate, the cost of direct loans from the Fed, by a quarter point to 4.75 per cent.

Some analysts predicted a bigger reduction. "If things deteriorate they will cut again," said Stephen Cecchetti, professor of international economics at Brandeis University in Waltham, Massachusetts, and a former director of research at the New York Fed.

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"If financial conditions don't start to improve dramatically," they might have to cut before the next meeting scheduled for January 30th, he said.

The gap between the discount rate and the federal funds rate remains half a point.

"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending," the FOMC said. "The committee will continue to assess the effects of financial and other developments in economic prospects and will act as needed to foster price stability and sustainable economic growth." The central bank also said some "inflation risks remain".

The decision was not unanimous. Boston Fed president Eric Rosengren voted in favour of a half-point cut. The benchmark rate is now at the lowest level since January 2006.

Ben Bernanke (53), who succeeded Alan Greenspan as chairman the following month, continued a series of increases that lifted the federal funds rate to 5.25 per cent by June last year.

Policy makers held their ground until August this year, when the collapse in assets backed by subprime mortgages roiled markets around the world and forced central banks to pump billions of dollars into the banking system. It also spurred the Fed to start cutting the federal funds rate in September.

The Fed was joined last week by the Bank of Canada and Bank of England.

Investor confidence in Germany dropped more than economists forecast in December, reaching the lowest level in almost 15 years, as rising credit costs dimmed the outlook for economic growth. The Mannheim-based ZEW Centre for European Economic Research said its index of investor and analyst expectations fell to minus 37.2, the lowest since January 1993, from minus 32.5 last month.

"The gloom reflects investors' concerns about the economy," said Gareth Claase, an economist at Royal Bank of Scotland.

"At the same time, don't forget that it is financial analysts filling in the forms. So their sentiment about their own industry maybe exaggerated their pessimism." - ( Bloomberg)