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UPDATED: October 30, 2008  
Federal Reserve Cut Rates by Half-point
U.S. Federal Reserve decided Wednesday to cut a key interest rate by half a percentage point to 1.0 percent to prevent the economy from slipping into deep recession

U.S. Federal Reserve decided Wednesday to cut a key interest rate by half a percentage point to 1.0 percent to prevent the economy from slipping into deep recession.

The Wednesday's unanimous vote set the rate to the lowest level since 2004, when the U.S. economy was climbing out of a recession earlier in the decade. The funds rate has not been lower since 1958, when Dwight Eisenhower was president.

"The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures," said the Federal Reserve in a statement.

"Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports," it warned.

"Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit," it added.

However, the Federal Reserve said it expects inflation to moderate in coming quarters to levels consistent with price stability, "in light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity."

The Wednesday's cut followed an emergency half-point cut earlier this month coordinated with other six major central banks to help cope with the current financial crisis.

Other central banks might also slash the rates to ease the global credit crisis. China's central bank, the People's Bank of China (PBOC), cut benchmark interest rates by 0.27 percent earlier Wednesday.

The European Central Bank and the Bank of England are expected to follow next week.

"Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth," said the Federal Reserve in the statement.

It also warned that downside risks to growth remain, hinting that more rate cuts might be possible.

The Fed will monitor economic and financial developments carefully and "will act as needed to promote sustainable economic growth and price stability," it noted.

"It's been an amazing U-turn," said Erik Nielsen, economist with Goldman Sachs in London. "They've realized inflation is no longer a problem, and now they're out to save the world."

In a related action, the Federal Reserve also unanimously approved a 50-basis-point decrease in the discount rate to 1.25 percent.

With the U.S. economy still deteriorating, lower rates and other actions by the Federal Reserve and other U.S. policy makers look like a strong possibility, according to the U.S. media.

"If the economy weakens further, it may open the door for another 25 or 50 basis points in December," said John Silvia, chief economist at Wachovia Corp.

"This Federal Reserve has been extremely aggressive in terms of providing liquidity," said Frederic Mishkin, a former Fed governor and now a Columbia University professor.

Should rates go even lower now, they could hit levels not seen since the 1950s.

However, many economists believe that with rates already so low, the Fed might decide to hold at 1 percent, leaving some room for a further reduction if needed next year.

(Xinhua News Agency October 30, 2008)

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