U.S. Fed cuts rates half a percentage point to boost economy

The U.S. Federal Reserve sliced its key interest rate by half a percentage point to one per cent — the lowest rate in four years — on Wednesday in yet another bid to loosen global credit markets and kick-start an increasingly moribund economy.

The Open Market Committee, the group within the U.S. central bank that decides on the direction of interest rates, dropped the fed funds rate by fifty basis points, the second such cut in October.

The one per cent Fed funds rate is the lowest level for borrowing costs since June 2004, when the central bank had rates at that same level.

The U.S. Federal Reserve said the economic picture is darkening, with further financial deterioration a distinct possibility.

"The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports.

"Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit," the central bank said in a press statement.

Since the global financial crisis began in earnest in September, governments from Japan to Iceland and everywhere in between have been forced to take over banks, shovel extra liquidity into the monetary marketplace and cut interest rates. They are trying to prevent a financial crisis from becoming a major industrialized recession.

The Federal Reserve has been cutting its interest rates aggressively in a bid to get borrowers borrowing and lenders lending once again.

Lower interest rates often lead to more economic activity in various sectors.

Wednesday's cut announcement did not outweigh continued economic concerns and could not keep the influential Dow Jones Industrial Index out of negative territory.

The Dow slipped 74 points to end the trading session at about 8,991.

Many analysts had forecast Wednesday's 50-basis-point rate cut. Still, there was a one-in-four chance that Ben Bernanke's Federal Reserve would knock rates down by 75 basis points, driving borrowing costs below one per cent for the first time in American history.

The U.S. economy is already on track to shrink by 1.1 per cent in the third quarter of this year and by a further two per cent in the final three months of 2008, according to BMO Capital Markets.

Worse still, the American economy, which actually will grow by 1.3 per cent over the entire 2008, will contract in 2009, by 0.2 per cent.

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