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US Central Bank Cuts Key Interest Rate by Bold Half-Percentage Point

The U.S. Federal Reserve Tuesday cut key short-term interest rates by a half percentage point in an aggressive move to protect the economy from a housing slump and the related mortgage market turbulence. VOA's Cindy Saine reports from Washington.

The half percentage point cut in the interest rates that banks charge each other for overnight loans was bigger than the quarter-point cut many experts had anticipated, taking the federal funds rate down to 4.75 percent.

Alan Viard, a senior economist at the Federal Reserve Bank of Dallas and is now a resident scholar with the American Enterprise Institute, said he was surprised by the half-point reduction. "I think what the Fed has decided to do is just to take very aggressive action. And specifically to respond to what's going on in the financial markets," he said.

The New York stock market responded enthusiastically to the rate cut, with the Dow Jones industrial average rising more than 330 points by the end of the day Tuesday.

This was the first federal funds rate cut in more than four years. It is also the first for Fed Chairman Ben Bernanke, who is facing a major test with financial markets in turmoil. The Federal Reserve has been slowly raising interest rates over the past four years to fight off the threat of inflation.

Robert Scott, Director of the Washington-based International Programs at the Economic Policy Institute, said the Fed's bold rate cut reflects serious concerns. "Well I think the Fed is more worried than some have expected about the mortgage crisis and its likely effect on consumer spending. I think that crisis is going to get a lot worse before it gets better, and I think the Fed is well aware of this," he said.

Scott said he expects there may be more rate cuts to come, and he likened the U.S. economy to an aircraft carrier that is very hard to turn around once it is going in a certain direction.

The Fed's announcement came just hours after the release of a report from an online real estate company that said an increasing number of Americans are at risk of losing their homes to foreclosure.

The U.S. housing market has been affected by the rising number of people unable to pay off so-called sub-prime mortgages given to borrowers with weak credit.