US Fed cuts interest rate to 2%

01 May 2008 / by Rachael Stiles
The United States' Federal Reserve has cut interest rates by a quarter point to two per cent, the lowest rate since 2004, as it strives to halt America's economic downturn amidst a collapsing housing market and global credit crisis.

This cut marks the seventh consecutive reduction in a sequence which has seen the Fed – the American equivalent of the Bank of England – lower rates from 3.25 per cent since September. It has also lowered its discount rate for emergency lending to US banks by another quarter point to 2.25 per cent.

Voting 10 to two for the 25 basis points cut, the move was largely a reaction to the news that the US economy almost ground to a halt in the first quarter of 2008, growing by just 0.6 per cent.

"Recent information indicates that economic activity remains weak," the Fed said in a statement. "Household and business spending has been subdued and labour markets have softened further," it continued, pledging to "act as needed" in order to promote growth whilst also curbing inflation.

"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 report said.

The statement was unclear about whether or not this will be the last in the latest series of rate cuts, leaving open the possibility of another cut when the Federal Open Market Committee meets again in June, but also not ruling out taking a break for a month or more before making another cut later in the year.

In light of the recent increase in inflationary pressure caused by a weak dollar, which fell against the Euro yesterday, and rising global commodity prices, Wall Street economists believe that the Fed will adopt a 'wait and see' attitude and react accordingly to events as they unfold.

The Dow Jones closed down 11.80 points on Wednesday night after the cut – which was expected but more dovish than many predicted – as investors' uncertainty about further cuts grew, prompting them to lock in profits.

The rate cut revived the debate over whether or not the US is heading for, or indeed is already in, a recession, fuelled by other downturns in the economic outlook such as a decline in employment. However, hopeful economists maintain that while growth exists, however small, the country is not in a recession.

© Fair Investment Company Ltd