U.S. Fed cuts benchmark interest rate to 1%

WASHINGTON -- The Federal Reserve cut U.S. interest rates by a hefty half-%age point Wednesday to try to keep a credit crisis from tipping the economy into a deep recession, and it left the door open to further reductions if needed.

The Fed's unanimous decision takes its target for overnight bank lending to 1%, the lowest since June 2004. Wall Street was united in the opinion the Fed would lower rates, although views were split on the likely size of the move.

"The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures," the Fed said in a statement outlining its decision. "Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending."

The U.S. central bank has cut benchmark overnight rates from 5.25% in nine steps over the past 13 months to counter a financial storm that started with the collapse of the U.S. mortgage market and spread around the world.

Fears of an acute recession have pushed U.S. stock prices down sharply this month, although equities enjoyed a large rally Monday. The blue chip Dow Jones industrial average was up before the Fed's decision, but turned lower after the central bank's announcement.

The dollar trimmed loses against the euro and prices for U.S. government debt pared gains.

The Fed has acted aggressively to combat the credit crisis with a series of measures aimed at pumping liquid funds into markets that had become largely frozen and risk averse, and policy-makers highlighted those steps in their statement.

Nonetheless, they concluded that "downside risks to growth remain," keeping open the option of further rate cuts.

While the Fed's steps to counter the credit crisis have begun to bear some fruit, U.S. businesses and consumers looking ahead see an increasingly gloomy economic outlook.

"The economy (is) likely to be weak for several quarters, and with some risk of a protracted slowdown," Fed Chairman Ben Bernanke told Congress on Oct. 20 as he endorsed additional spending by the government to boost the economy.

Economists polled by Reuters expect a report on gross domestic product Thursday to show the economy contracted at an annualized 0.5% rate in the third quarter.

The U.S. labour market has shed jobs for nine consecutive months, pushing the jobless rate to 6.1% in September, while industrial production has tumbled. Consumer confidence plunged to a record low this month.

"The expectation is (for) a long and deep recession in the U.S. that will extend through most of 2009," Allen Sinai, chief economist for Decision Economics, told a conference Monday.

"The previous longest post-World War II economic downturns were 16 months each in 1973-75 and 1981-82. This one probably will be longer," he said.

A key component of U.S. economic malaise is a depressed housing market. Demand for new homes is low and a sizable backlog of unsold homes clutters the market, suggesting residential construction will continue to contract into 2009.

The decelerating U.S. economy has led to a sharp retrenchment in energy prices, pointing to lower inflation. Crude oil has fallen by more than half since a record peak at US$147 a barrel in July.

© Thomson Reuters 2008