- WASHINGTON (Reuters) - The
U.S. Federal Reserve on Wednesday slashed interest rates by an aggressive
half percentage point to a fresh four-decade low in a bold bid to reignite
an economic recovery in danger of stalling.
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- In a further unexpected move, policymakers signaled they
would likely stand pat after this cut, saying risks to the economy were
balanced between weakness and inflation and that the reduction should help
the economy through its "soft spot."
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- The central bank's policymaking Federal Open Market Committee
decided to drop the U.S. central bank's trendsetting federal funds rate
to 1.25 percent. It was the first rate cut this year -- after 11 reductions
in 2001 -- and reflected concern the economy was losing steam.
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- Stock markets, which had expected a more modest quarter-point
reduction, rose across the board after the decision while bond prices fell
slightly.
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- For a second time in a row, the Fed cited uncertainties
stemming from a possible war with Iraq, saying these were holding the economy
back.
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- "Incoming economic data have tended to confirm that
greater uncertainty, in part attributable to heightened geopolitical risks,
is currently inhibiting spending, production and employment," the
Fed said in its post-meeting statement.
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- "The committee believes that today's additional
monetary easing should prove helpful as the economy works its way through
this current soft spot," it added.
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- A growing volume of recent data has suggested the slow
recovery from last year's recession is faltering badly -- new orders for
costly manufactured goods are falling, October new-car sales were down
from a year earlier in a worrying sign for consumer spending while October
also saw a second straight monthly decline in payrolls outside the farm
sector.
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- The vote to cut interest rates was unanimous.
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- At the beginning of the year, most analysts thought policymakers
would be raising rates by now to keep inflation in check rather than cutting
them to keep the recovery afloat.
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- Indeed, the economy grew throughout the four quarters
ending with this year's third quarter at an average annual rate of around
3 percent. But the wind has seemed to have left the recovery's sails at
the tail-end of the third quarter.
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- Last week, the Labor Department said the economy shed
5,000 jobs in October. On Monday, the Commerce Department said orders to
U.S. factories dropped 2.3 percent in September after a smaller August
fall.
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- And the private Conference Board said last week its Consumer
Confidence Index slid in October to a nine-year low of 79.4 -- a disheartening
sign with the key holiday shopping season between Thanksgiving and Christmas
on the horizon.
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- The decision by voters in the U.S. congressional elections
on Tuesday to hand control of both the House of Representatives and Senate
to President Bush's Republicans may make it easier for the administration
to craft a fiscal stimulus package to supplement cheaper interest rates.
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- Economists say this may take some of the pressure off
the Fed to act aggressively on interest rates in future.
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- The current federal funds rate level is near the rate
of inflation in the economy, which tends to blunt the impact of rate reductions.
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- One benefit of cheaper credit is that it may sustain
growth in the housing sector, long one of the bright spots in a patchy
economic picture. Low mortgage rates have spurred homebuilding and sales
and enabled existing homeowners to refinance and to spend the money they
save on monthly payments.
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