Thursday, October 30, 2008

Fed cuts key rate to 1% - Extends US$30b credit line to foreign banks

Published: Thursday October 30, 2008

The Federal Reserve has slashed a key interest rate by half a percentage point as it seeks to revive an economy hit by a long list of maladies stemming from the most severe financial crisis in decades.

The central bank on Wednesday reduced its target for the federal funds rate, the interest banks charge on overnight loans, to one per cent, a low last seen in 2003-2004.

The funds rate has not been lower since 1958, when Dwight Eisenhower was president.

New lines of credit

The Federal Reserve also said Wednesday it will supply new lines of credit to the central banks of Brazil, Mexico, South Korea and Singapore to help those countries deal with the global credit crisis.

The Fed says it will provide up to US$30 billion to each of the central banks.

It is the latest in a series of "swap" arrangements where the Fed provides dollars in exchange for reserves of the other nations' currencies.

The Fed said Wednesday that the new credit lines, like those already established with other countries, were designed "to help improve liquidity conditions in global financial markets" by increasing the global availability of US dollars.

Second reduction

The rate cut marked the second half-point reduction in the funds rate this month.

The Fed slashed the rate by that amount in a coordinated move with foreign central banks on October 8.

In a brief statement explaining Wednesday's action, the Fed said the "intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and business to obtain credit".

The central bank said it had room to lower rates because the spreading economic weakness was lowering the risks that inflation would get out of control.

Dramatic declines

Indeed, the weakness has caused dramatic declines in the price of oil and other commodities.

While many economists believe the US has already fallen into a recession, they think the aggressive efforts by the Fed to cut rates and take other actions to unfreeze credit markets will keep the country from plunging into a prolonged and deep downturn.

The Fed's action was expected to be quickly followed by a reduction by commercial banks in their prime lending rate, the benchmark for millions of consumer and business loans, by a similar half-point.

Source: Jamaica Gleaner

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