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Wednesday, January 30, 2008

Fed cuts key interest rate by half-point to 3.0%, signals door open for more

WASHINGTON (MarketWatch) - The Federal Reserve decided to cut interest rates by a half-point and signaled that the door remains open for more cuts.

The central bank lowered the federal funds rate by a half of one percentage point to 3.0%. Financial markets were hoping the Fed would cut decide to cut rates by this amount.
The Fed also announced that it was cutting its discount rate, the interest it charges on direct loans it makes to banks by a half-point to 3.5%.
The move signals that the Fed is concerned about the economic outlook.

In a statement, the Fed said that downside risks to growth remain. The Fed said it would act in a timely manner to address risk.
"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," the Fed said.

"Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets," the statement said.
There was one dissent. Dallas Fed president Richard Fisher said he did not think the Fed should have lowered rates at all.
There was only a passing reference to inflation.

The Fed said it expects inflation to moderate in coming quarters but said it would watch the situation carefully.
The Fed has now cut rates five times by a cumulative 2.25 percentage point. Many Wall Street economists now think the Fed will have to lower rates to 2.5% by spring to stave off a possible serious recession.

The next two formal FOMC meetings scheduled for March 18 and April 29-30.
Last fall, the Fed rate cuts were measured and occurred at regular meetings, but last week the Fed changed tactics and engineered an emergency-three-quarter of a point rate cut.

Many analysts said the Fed also reacted to a sharp downturn in global stock markets. There was concern that this would spread to the U.S. and make the outlook worse.
News that some of the sharp fall in European stock markets might have been exacerbated by Societe General unwinding stock positions from a rogue trader was seen as an embarrassment to the Fed and a sign that global central bank cooperation is not what is often advertised.
But Fed watchers said the trouble at the French bank was more of a sideshow.
Dominating the economic landscape is the weak U.S. housing market. Home prices are falling, an exceedingly rare event.

Some analysts see a risk of a vicious circle, where falling home prices leads to a curb in banking lending that would curb consumer spending. Large international banks are reeling from their holdings of complex securities tied to U.S. mortgages.

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