US Federal Reserve cuts interest rates by 0.5% to 4.0%

The US Federal Reserve has cut short term interest rates by 50 basis points, the fifth cut this year in an aggressive campaign…

The US Federal Reserve has cut short term interest rates by 50 basis points, the fifth cut this year in an aggressive campaign to get the US economy back on a growth track.

The easing of US rates was widely expected. Four earlier cuts totalling 200 basis points have failed to lift the US manufacturing sector out of recession. The US unemployment rate climbed to 4.5 percent in April, threatening a sharply drop in spending which could tip the entire economy into recession.

The Fed said a significant reduction in excess inventory seemed well advanced and consumption and housing expenditures had held up reasonably well but activity in these areas had flattened recently.

With pressures on labour and product markets easing inflation was expected to remain contained, the Fed said. In pursuit of its goal of price stability and economic growth the risks were weighted towards conditions which might generate economic weaknesses in the forseeable future. It would therefore cut interest rates 50 basis points to four per cent.

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The Fed's chief policy-making group, the Federal Open Market Committee, announced the cut at 2.15 PM (7.15 Irish Time) after a scheduled meeting in Washington.

The US economy grew at an annual rate of 2 per cent in the first three months of this year, twice as fast as the 1 per cent growth rate registered in the fourth quarter. But economists predict the current quarter will show near zero growth.

The central bank last cut rates April 18, after an emergency telephone conference call convened by Greenspan. It was the second time this year the Fed took the unusual step of changing rates outside its normal meeting schedule.

As a result of that action, the federal funds rate, the interest that banks charge each other and a key interest rate controlled by the Fed, was cut to 4.5 per cent.

Economists haven't ruled out a sixth rate decrease at the Fed's June 26-27th meeting. That, they say, hinges on what economic data out between now and then says about the economy's health.