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US Cuts Key Interest Rate to Stave Off Economic Downturn


The Federal Reserve, the U.S. central bank, on Wednesday cut short-term interest rates in an effort to boost the slowing economy. VOA's Barry Wood reports it was the eighth cut in the overnight federal funds rate in the past year.

The action takes the fed funds rate to one percent, a rate well below inflation. The move is intended to stimulate lending and make the cost of borrowing cheaper. Bank lending has been essentially frozen for months due to a year-long credit squeeze that was triggered by defaults on sub-prime U.S. mortgage loans.

William Poole, a former governor of the Federal Reserve, says the Fed acted because economic activity has slowed dramatically.

"The economy has really hit a wall. Things are really dramatically weaker than they were just a month ago," Poole said on Bloomberg Television.

In its statement, the Fed said that economic growth had slowed markedly and that the economy faces more downside risks.

Poole says there may be additional rate cuts ahead.

"Yes, absolutely," he said. "Now the immediate question in the market and among economists will be, 'Do they [i.e., the Federal Reserve] go down some more - 75 basis points or 50? What happens when they get to 25 [i.e., a quarter-of-a-point federal funds rate? Does monetary policy have any room left to stimulate the economy?'"

Only three weeks ago the Federal Reserve, in coordinated rate cutting moves with European and Asian central banks, reduced short-term interest rates by half of a percent. One year ago, when the Fed was worried about inflation, the fed funds rate stood at 5.25 percent.

Experts say the speed and size of the rate cuts during the past year reveal how seriously the central bank views the global financial crisis. The last time short-term rates were this low was 2003, when the economy was recovering from recession. However, low interest rates have been blamed for the speculative frenzy in the housing sector - a bubble that burst early last year, sparking today's financial crisis.

Stock prices in New York fell on Wednesday with the Dow Jones Industrials losing 77 points to 8,988. Oil prices rallied nearly $5 to about $68 a barrel. And the U.S. dollar was lower against the yen and the euro.

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