THE FEDERAL Reserve has slashed US interest rates to a four-year low of just 1 per cent amid deepening economic gloom and left the door open to cutting rates further towards zero.
The Federal Open Market Committee voted unanimously last night to lower the target federal funds rate at which banks lend to each other by half a percentage point to 1 per cent, its lowest since between June 2003 and June 2004.
"The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures," the committee said.
The Fed also toned down its language on inflation, saying only that it expected it to moderate in coming quarters. After an emergency interest rate cut earlier this month, co-ordinated with other major central banks, the Fed had suggested it still saw some risk inflation could flare.
"The Fed appears to have buried its upside inflation risks," Michael Gregory, an economist with BMO Capital Markets in Toronto, wrote to clients. "Bottom line: No upside inflation risk plus persistent downside growth risk equals a policy bias to ease further.
The rate cut came as no surprise to Wall Street as fresh data showed the housing market worsening and a recession all but inevitable. Third-quarter GDP figures, due for release today, are expected to show the US economy shrinking by 0.5 per cent at an annual rate. Unemployment is expected to climb above 7 per cent before the end of this year, but the Fed said it expects inflation to ease as fuel prices fall.
"In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the committee expects inflation to moderate in coming quarters to levels consistent with price stability," the committee said.
US stocks swung wildly in the immediate aftermath of the Fed's move. By mid-afternoon in New York, the SP 500 was down 0.3 per cent at 938.11.
The Fed action followed the third cut in interest rates in six weeks by the People's Bank of China, which said the benchmark rate for one-year loans by commercial banks would fall by 27 basis points to 6.66 per cent.
The Bank of England and the European Central Bank, which have cut rates much less than the Fed over the past year, are expected to ease rates aggressively in coming days. - (Additional reporting: Financial Timesservice/Reuters)
