The Federal Reserve (Fed) on Wednesday cut a key interest rate by combined 0.5 percentage points to 3.0 percent, the lowest since June 2005, indicating that the US central bank saw more downside risks to economic growth than upside ones to inflation.
Fed lowered the federal funds rate, which commercial banks charge each other on overnight loans, by half a percentage-point to 3.0 percent.
The action came just eight days after the bank decreased the rate by a hefty 0.75 point to 3.5 percent from 4.25 percent.
The latest rate cut, combined with the previous four taken since last September, "should help to promote moderate growth over time and to mitigate the risks to economic activity," hoped Fed.
"Downside risks to growth remain," the central bank said, noting it "expects inflation to moderate in coming quarters."
The consecutive rate cuts came as fears of a possible economic recession has grown amid a deepening housing contraction, the worst in more than two decades, and a deteriorating credit crunch stemming from troubles in the subprime market.
In the final three months of last year, the US economy, the biggest in the world, nearly stalled, slowing to an annual rate of just 0.6 percent, down significantly from a brisk pace of 4.9 percent in the third quarter.
Considering the weak performance in the fourth quarter, some economists think the economy has been on track to recede from January through March.
The big worry is that consumers and businesses will cut their spending and investment dramatically, throwing the economy into a recession.
Lower rate to give boost to economy
By lowering interest rates aggressively, Fed has been encouraging more borrowing to give the economy a needed boost.
"We expect to see a continuation of weak economic indications in the remainder of the first quarter of 2008, leading to another cut in the rate at the Fed's next scheduled meeting on March 18," said an economist in response to a WSJ.com survey on the rate cut on Wednesday.
Drew Matus, an economist at Lehman Brothers, said the aggressive rate cut suggested that, once inflation returns as a concern for Fed, "rate hikes could come more quickly than we have seen in the past."
Skeptical voices remain
A significant minority of economists, however, argued that policy makers have left themselves unnecessarily alarmed by panicky swings in the stock market, according to The New York Times on Wednesday.
If the central bank props up the economy with easy money, they warned, the result would be higher inflation in the future.
Richard DeKaser, chief economist at the National City Corporation, remained skeptical that the economy is headed for a recession.
He cited the latest labor market data which showed fewer weekly claims for unemployment benefits, saying it suggested to him that the nation has added a hefty number of jobs in January.
"The key will be the jobs situation," said an economist at Naroff Economic Advisors while responding to the WSJ.com survey.
This may not be the last move on the part of Fed, but it will take "additional very soft" economic data to get more action, said the economist.
The economist believed that the economy could skirt a recession and a 3.0 percent funds rate could be low enough to get the job done.
Even among Fed policy-makers, there are signs of disagreement as the vote on whether to cut the rate on Wednesday was not unanimous.
Dallas Federal Reserve Bank President Richard Fisher dissented, saying he preferred no change in the federal funds rate this time.
The aggressive rate cuts could further open Fed to criticism that they are responding to the will of financial markets rather than doing what is needed to balance economic growth and low inflation, according to The Washington Post on Wednesday.
(Xinhua News Agency January 31, 2008)
