Fed cuts US interest rates to 3%

US economy in graphics

The Federal Reserve has cut interest rates for the second time in nine days as it tries to keep the US economy from entering a recession.

The central bank lowered rates to 3% from 3.5% after a two-day meeting.

Last week, the Fed slashed the cost of borrowing by the largest amount in 25 years in a shock move to calm tumbling global stock markets.

The Fed is hoping the cuts will cushion the US economy from the worst effects of the credit crunch and housing slump.

"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," the central bank's Federal Open Market Committee (FOMC) said.

"Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labour markets."

Markets pleased

The half a percentage point cut was bolder than some economists were expecting and it pleased financial markets.

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US shares reversed early losses and gained ground on hopes for a revival in economic growth after the Fed's aggressive action.

But the main Dow Jones stock index ended the day lower as investors took profits.

"The members recognise that the threats to the financial markets and therefore to economic growth remain and that they had to get the Fed into accommodation mode," said Joel Naroff at Naroff Economic Advisors.

"They have done so in a very dramatic fashion and have made the financial markets very happy."

The rate cut was approved by a nine to one vote.

Richard Fisher, president of the Fed's Dallas region bank, voted against the cut, preferring no change in rates.

Weak growth

Data released earlier showed weak economic growth in the final three months of 2007 as the housing market slump deepened and consumer spending cooled.

Growth slowed to an annual rate of 0.6% between October and December, half the rate forecast and compared with a brisk 4.9% growth rate in the previous three months.

The Fed is aiming to lift confidence in the world's largest economy

Despite the growing evidence of a severe slowdown, President George W Bush encouraged Americans to have confidence in the US economy.

"There's signs that our economy is slowing. There's some uncertainty in the economy," the president said during a visit to a helicopter factory.

"But in the long run you've got to be confident about your economy. Inflation is down, interest rates are low, productivity is high, our economy's flexible, it is resilient," he said.

Criticism

Some observers criticised the Fed for bowing to the short-term priorities of financial markets.

The global credit crisis is rooted in problems in the US housing market

"The Fed looks foolish. It seems they're afraid of the market," said David Greenwald, a partner at Scalene Capital Management.

"Everyone knows that it takes a while for 75 basis points to get through the economy and by cutting 50 now, I just think they're not leaving much room in the future."

Interest rates have now been cut five times since 18 September 2007, when the Fed first lowered rates in response to the credit crisis.

The Fed cut the cost of borrowing by three quarters of a percentage point last Tuesday in an emergency unscheduled move.

The last two such emergency cuts were on 17 September 2001, shortly after the attacks of 11 September, and on 3 January 2001, in the wake of the dotcom bust.

The last time the Fed cut rates by as much as three-quarters of a percentage point was in August 1982, almost 26 years ago.