Federal Reserve makes second aggressive cut

Source: Exec Digital USA

Date :3/19/2008 8:38:41 AM

The U.S. central bank reduces Fed Funds by 0.75 points as it steps up its campaign to save the economy from recession.

The cut in interest rates follows the bank’s previous emergency three-quarter-point in January, and a further half-point cut eight days later as it attempts to restore confidence to nervous financial markets and boost the ailing economy.

Last night’s move took the total reduction in official interest rates to three percentage points in the past six months. Rates have been cut by two full points in the past three months alone.

The Fed also ordered a parallel three-quarter-point cut in its discount rate on emergency lending, lowering this to 2.5 percent.

Wall Street

Initially Wall Street reacted hesitantly to the decision, which dashed hopes of a whole percentage point cut. However, shares were lifted by better-than-expected results by investment firms Goldman Sachs and Lehman Brothers, taking the Dow Jones industrial average 420 points higher.

The S&P 500 had its best daily percentage gain since October 2002, rising 54.15 points, or 4.24 percent while the dollar reversed earlier losses as currency markets reacted to the lower than predict rate cut, with the euro sliding 0.2 percent to around $1.57.

Mitigate risks

Announcing its verdict, the Fed said that recent developments suggested that the outlook for the American economy had weakened still further.

“Growth in consumer spending has slowed and labour markets have softened,” it noted.

“Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.”

Despite conceding that risks to America’s fragile financial system could grow worse, the central bank did reassure markets, insisting that its recent cuts should “help to promote moderate growth over time and to mitigate the risks to economic activity.”

March 19, 2008