To stop the bleed, US Fed cuts very deep: 0.75 per cent

The US Federal Reserve reduced its benchmark interest rate by three-quarters of a percentage point on Tuesday...

The US Federal Reserve reduced its benchmark interest rate by three-quarters of a percentage point on Tuesday, to 2.25%, a cut that was less than investors had been hoping for even though it was one of the deepest in Fed history. While leaving the door open for additional rate cuts, policy makers also expressed growing concern about inflation. “Uncertainty about the inflation outlook has increased,” the central bank said. “It will be necessary to continue to monitor inflation developments carefully.”

The statement highlighted the growing problem that the Fed faces, between fighting an economic downturn and heading off new inflationary pressures that have become apparent in everything from energy and food prices to the falling value of the dollar.

In a sign of the difficult choices the Fed faces, two of the 10 members of the policy-making Federal Open Market Committee dissented from the decision, favouring a smaller rate cut.

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The Fed’s announcement was the culmination of an extraordinary series of actions over the last two weeks to prop up financial markets and the economy with a flood of cheaper money.

The Federal Reserve has reduced its overnight lending rate, the federal funds rate, six times since September, and did so twice in January alone. With the latest reduction, the federal funds rate is far below the rate of inflation, meaning that the “real,” or inflation-adjusted, rate is below zero. It is also well below the European Central Bank’s benchmark interest rate of 4% or the Bank of England’s rate of 5.25%.

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