The U.S. Federal Reserve decided Wednesday to cut a key interest rate by a quarter percentage point to 4.5 percent to help the economy survive the current housing slump and credit crunch.
This was the second consecutive cut in the central bank's target for the federal funds rate, the interest rate that commercial banks charge each other for overnight loans, in one and a half months.
On Sept. 18, the Fed lowered the key rate by an aggressive 0.5 percentage point to 4.75 percent from 5.25 percent, where it had stood at since June 2006. That was the Fed's first rate cut in more than four years.
As a result of the Wednesday decision, commercial banks' prime lending rate, the benchmark for millions of consumer and business loans, will drop by a corresponding amount to 7.50 percent, once again giving borrowers some breathing room.
The prime rate responds to changes in the federal funds rate.
In addition to the cut in the target rate, the Fed also reduced its discount rate, the interest it charges in making direct loans to commercial banks, by a quarter percentage point as well to 5.0 percent.
Announcing the decision to cut interest rates, the Fed said in a statement that economic growth was solid in the third quarter and strains in financial markets have eased somewhat on balance.
"However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction," it said.
"Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time," said the central bank.
As for inflation, the Fed said that readings on "core" inflation, which excludes volatile energy and food, have improved modestly this year.
But "recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation," it said.
In this context, the Fed judges that some inflation risks remain, and it will continue to monitor inflation developments carefully, according to the statement.
Meanwhile, the Fed said that it judges that, after this action," the upside risks to inflation roughly balance the downside risks to growth."
By stating that risks are now roughly balanced, the Fed could be signaling that it judges that further rate cuts will not be necessary, according to analysts.
Economists now are worried that growth pace could be much slower than the third-quarter rate in the final three months of this year as the economy struggles with a deepening housing slump.
While many economists are hopeful the economy can avoid a recession, growth in the fourth quarter is expected to slow to a pace of around 2 percent or less.
In the statement, the Fed stressed that it will continue to assess the effects of financial and other developments on economic prospects and will "act as needed" to foster price stability and sustainable economic growth.
Source:Xinhua
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