Washington - The Federal Reserve cut its benchmark interest rate by 0.75 points to 2.25 per cent on Tuesday in an attempt to boost the sagging US economy and temper volatility in global financial markets. "Recent information indicates that the outlook for economic activity has weakened further," the Fed said in a statement explaining its decision. "Growth in consumer spending has slowed and labour markets have softened."
The US central bank has now lowered the federal funds by a total of 2 per cent since the beginning of the year. Some analysts had predicted the Fed might cut interest rates by as much as 1 percentage point on Tuesday.
The Fed also slashed its discount lending rate to banks by 0.75 points to 2.5 per cent. In a rare emergency meeting Sunday the Fed cut the discount rate by 0.25 per cent, and also opened up this special avenue for lending to investment banks, instead of only to commercial banks as has been the case in the past.
The Fed has taken a series of unprecedented moves over the past week in a bid to shore up investment banks battered by an ongoing credit crisis caused by a record number of home foreclosures over the last half-year.
Banks have reported billions of dollars in writedowns as the value of mortgage-backed securities have declined sharply. The Fed on Sunday sanctioned the sale of Bear Stearns to JPMorgan Chase, for a fraction of its value, to prevent the fifth-largest US investment bank from filing for bankruptcy.
Bear Stearns' downfall caused a sharp drop in stock indices around the world Monday amid fears that other banks could be in a similar position.
The credit crisis has filtered into other sectors of the US economy, and the Fed made clear that its measures over the week were designed to boost growth.
"Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity," the statement said.
The Fed acknowledged that inflation has been "elevated" by some indications but predicted that it would "moderate in coming quarters" as rising energy and other commodity prices began to level out.
The Federal Open Market Committee voted 8-2 in favour of the rate cut. Two members "preferred less aggressive action," the Fed said.
