Fed trims base rate by quarter point, cites 'slowing' economy
Posted: 12 December 2007 0328 hrs
WASHINGTON : The Federal Reserve cut its base federal funds rate by a quarter percentage point on Tuesday to 4.25 percent in an effort to shore up economic activity in the face of weak housing and credit turmoil.
The Federal Open Market Committee (FOMC) voted 9-1 in favour of the action, with one member supporting a half-point reduction.
"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending," the panel said in a statement announcing the decision.
"Moreover, strains in financial markets have increased in recent weeks. Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time."
The central bank also cut its discount rate, a previously little-used tool for direct lending to commercial banks when credit is scarce, by a quarter point to 4.75 percent. Some analysts had forecast a bigger reduction.
Even though the world's biggest economy has managed solid growth over the second and third quarters of 2007, some analysts say the Fed must be prepared for a downturn in the face of tight credit and a worsening housing slump.
"Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation," the FOMC statement said.
"The Committee 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."
The panel headed by Fed chairman Ben Bernanke almost unanimously favoured a reduction. But voting against was Boston Fed chief Eric Rosengren, who wanted to lower the federal funds rate by 50 basis points.
Wall Street sold off sharply immediately after the announcement, apparently concerned that the Fed acknowledged deeper economic problems but only made an incremental rate move.
"A quarter point isn't a heck of a lot and the stock market is concerned there isn't enough liquidity," said Robert Macintosh, chief economist at Eaton Vance. "I just don't know what a quarter point will accomplish."
But Scott Anderson, senior economist at Wells Fargo, called the move "a balanced and proper risk management decision to mitigate the downside risks to growth but cognizant of the fact that panicked or aggressive cuts might end up doing more harm than good."
Anderson said the Fed's statement "took out the balanced assessment of risks and seemed to focus on the deterioration of financial market conditions."
As a result, he said, "I think this opens the door for further cuts down the road." - AFP/de