US Federal Reserve cuts interest rates to 4.5%

The Federal Reserve, US on 31st October 2007 cut federal funds interest rate by a quarter percentage point to 4.5 per cent, as widely expected. The central bank also cut its discount rate, the rate it levies on loans to commercial banks, by a quarter of a percentage point to five percent.

The cut follows the bold half percentage-point reduction in September, implemented at the height of the credit squeeze. Policymakers have now lowered their target rate for overnight loans between banks by 0.75 percentage point in six weeks, the most aggressive easing since the US economy was emerging from its last recession in 2001.

Although US economic growth has been robust in recent months, economists fear growth could slow markedly in coming months, largely because of the housing downturn.

"Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time," Federal Open Market Committee said in a release.

"Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully," the release added.

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