Fed Cuts Main Rate to 2.25%


The Federal Reserve cut its main lending rate by three quarters of a percentage point to 2.25 percent as officials try to prop up the faltering economy and restore faith in the U.S. financial system.

``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 Federal Open Market Committee said in a statement after meeting today in Washington. ``Downside risks to growth remain.''

Chairman Ben S. Bernanke is struggling to cushion consumers and companies from the worst of the credit freeze that's made some of the world's biggest banks reluctant to lend to each other. The economy, which most analysts say is in a recession, lost jobs in two consecutive months, while retail sales and industrial production are declining.

``Recent information indicates that the outlook for economic activity has weakened further,'' the Fed said. ``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.''

``Inflation has been elevated, and some indicators of inflation expectations have risen,'' the Fed added.

The Fed Board of Governors also voted to lower the discount rate, the cost of direct loans from the central bank, to 2.5 percent. Officials reduced the normal 1-point spread over the federal funds rate in August to a half point to ease liquidity constraints. They further narrowed the difference on March 16, in the first weekend emergency move since 1979.

The Fed has cut the benchmark lending rate by 2 percentage points this year, the most aggressive easing since the federal funds rate became an explicit target of policy in the late 1980s.

The decision follows a week of emergency actions by the U.S. central bank, which has pushed its $900 billion balance sheet into the front lines of market turmoil to quell a collapse of brokerage firms and market making in mortgage-backed securities.

The Fed has lowered its benchmark overnight rate six times and the discount rate eight times since the middle of August, when the collapse of U.S. subprime mortgages started to infect markets around the world. The world's biggest financial companies have posted at least $195 billion in writedowns and credit losses tied to American mortgage markets as of March 1


Bloomberg
3/18/2008 11:29:45 AM