The U.S. Federal Reserve cut its benchmark interest rate by a quarter percentage point on Wednesday, in a further attempt to stop problems in the housing market from stifling overall economic growth. However, inflation continued to be a significant concern and one policy-maker refused to vote for the rate cut. Looking ahead, the central bank gave little indication about what it intended for future policy decisions. The Fed concluded that the risk of higher inflation was roughly balanced with the danger of slowing economic growth. Following a regularly-scheduled, two-day meeting, the Federal Open Market Committee, the policy-making arm of the U.S. central bank, announced that it has decided to lower its target for the federal funds rate by 25 basis points to 4.5%. This brought the key rate to its lowest level since early 2006. The Fed also cut its discount rate a quarter percentage point to 5%. Unlike most Fed decisions, Wednesday's rate cut did not come with a unanimous vote. Thomas Hoenig, president of the Kansas City Federal Reserve, voted against the move, preferring that the Fed leave its key rate unchanged. In a statement that accompanied the rate announcement, the FOMC predicted that economic growth will likely slow, due in part to an intensified downturn in the housing market. The Fed stated that Wednesday's rate cut, along with the one announced in September, was meant to blunt some of the negative impact from the disruptions in the financial markets that took place earlier this year. On a positive note, the Fed characterized third-quarter economic growth as "solid." The central bank also noted that strains in the financial markets have eased somewhat. There was significant uncertainty going into Wednesday's announcement about what the Fed would do. The general consensus was that the central bank would lower its benchmark rate by a quarter point, helping to ensure that the economy would not be hurt by the recent problems in the financial markets. However, several experts were hoping the Fed would hold rates steady, arguing that the risk of a recession was slight and that the central bank should stand firm against inflation. Meanwhile, another faction was calling for the Fed to lower rates by half a percentage point, under the belief that aggressive action was needed to protect economic growth. The Fed underscored fears of inflation in Wednesday's policy statement. The central bank said that core inflation has seen modest improvement this year, but noted that there has been renewed upward pressure, in part as a result of recent increases in energy and commodity prices. The Fed admitted some inflation risks remain, and said it will continue to monitor inflation developments carefully. At its last meeting, held on September 18th, the Fed decided to lower its benchmark rate by half a percentage point. Going into that move, the key rate had been stable at 5.25% for nine consecutive meetings, with the last policy change taking place in late June of 2006, when the Fed announced the last in its series of 17 quarter-point rate hikes. September's rate cut was the first time the Fed had reduced rates since June of 2003, when it announced the last reduction in a long cutting cycle that took the funds rate to a decades-low level of 1%. The FOMC said that September's move was meant to stop recent problems in the credit market from spilling over into the broader economy. The reduction in September was larger than most had anticipated, with experts generally expecting a quarter-point cut. In August, signs of significant problems in global credit began to roil the markets, as issues originating in the U.s. subprime mortgage industry sparked a general credit crunch. Though it had just left its key rate stable early in the month, the Fed joined other central banks around the world in aggressively injecting liquidity to ease the crisis.
October 31, 2007 3:13 PM