US Fed Cuts Short-term Interest Rate

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Last updated at: (Beijing Time) Thursday, November 07, 2002

US Fed Cuts Short-term Interest Rate

The US Federal Reserve (Fed) decided to cut a key interest rate by a half percentage point on Wednesday, the first rate reduction this year.

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The US Federal Reserve (Fed) decided to cut a key interest rate by a half percentage point on Wednesday, the first rate reduction this year.

The Fed's policy-making body, the Federal Open Market Committee,decided by a vote of 12-0 in a closed-door meeting to lower its target for the federal funds rate to 1.25 percent.

The federal funds rate, the interest rate commercial banks charge each other on overnight loans, is the Fed's main leverage to influence the economy.

The committee also approved a 50 basis point reduction in the discount rate and lowered the rate to 0.75 percent.

"Today's additional monetary easing should prove helpful as theeconomy works its way through this current soft spot," the committee said in a statement.

"Incoming economic data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks,is currently inhibiting spending, production and employment," the statement said.

By lowering short-term interest rates, the Fed policy-makers hope to motivate consumers to spend more and businesses to ramp upinvestment, something that would boost economic growth.

The reduction will help support the country's consumer confidence which is at its lowest level in the past nine years. The decline of consumer confidence, which has declined for the fourth consecutive month in October, was led by the loss of familywealth in the stock market and the uncertainties posed by a possible military invasion into Iraq.

However, some economists question whether Wednesday's rate cut will have the desired impact given the Fed has kept the borrowing costs at very low levels all year long.

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