U.S. Federal Reserve Lowers Interest Rate Again

US Federal Reserve lowers interest rate again

The US Federal Reserve has lowered the lending rate one-quarter of one point to 2 percent. The renewed lowering came in response to continuing turbulence in financial and real estate markets as expected. The Fed however acknowledged the action bore with it the risk of inflation.

The Fed is trying to kick-start the battered US economy with this seventh consecutive rate cut. The monetary watchdogs surrounding Fed chief Ben Bernanke lowered the lending rate from 2.25 percent to 2 percent and left the door open to further rate cuts in the future. Wall Street speculators had already foreseen the rate cut but many saw the latest action as a signal that there would be no foreseeable cuts in the near future. The decision resulted, therefore, in profit taking in markets.

The key interest rate in the US stood at 5.25 percent at the beginning of September. Since then, the Fed has aggressively lowered rates in order to support the banking system and the recession-endangered economy.

The Fed’s explanation for the latest cut was continuing weakness in the US economy. Additionally, it is feared that credit strictures by banks and falling real estate prices will continue during this business cycle. Consumers and businesses have already reduced their outlays, causing the Fed to concentrate on doing everything necessary for restoring economic growth.

American consumers not only have to contend with falling real estate values, but also with rising energy and grocery prices as well. Rising inflation is also causing the Fed headaches, since rising prices are fueled by each interest rate cut, a fact that caused two members of the Fed decision-making body to advise against the cut.

The Fed, however, did not express as much worry about inflation prospects as had been feared. In their estimation, the rate of price increase should moderate during the course of the year. The monetary watchdogs acknowledged, however, that predictions were hard to make because future energy and raw materials costs were uncertain.

Shortly before the rate cut announcement, new data showed that the world’s largest economy was in relatively good shape at the beginning of the year. Against all expectations, it was expected to maintain its tempo since GDP growth for the first quarter indicated an annual growth of 0.6 percent, the same as at the end of the previous year. Fed chief Ben Bernanke himself wouldn’t exclude the possibility of a recession in the first six months, but predicted a recovery in the second half of the year.