Fed offers modest rate cut

By Mark Felsenthal
Tuesday, December 11, 2007; 7:17 PM

WASHINGTON (Reuters) - The Federal Reserve cut U.S. interest rates by a modest quarter-percentage point on Tuesday, disappointing Wall Street hopes for bolder action but offering some help to an economy facing credit strains and a deep housing slump.

The central bank's decision takes the bellwether federal funds rate, which governs overnight lending between banks, down to 4.25 percent. While the action was widely expected, some economists had thought the Fed might offer a bolder half-point reduction.

In a related move, the Fed trimmed the discount rate it charges for direct loans to banks by a matching quarter point. Here too, some market participants were dissatisfied. Many had thought the Fed would lower the discount rate by more than the federal funds rate to loosen tight credit markets.

The blue chip Dow Jones industrial average (.DJI) closed down 294 points, or 2.1 percent, while prices for U.S. government bonds surged as investors sought safer assets.

"This was not what the market was looking for and did not move to clarify Fed intentions or assuage concerns of market participants of another leg down in the economy and resurgence of financial turmoil," said Joseph Brusuelas, chief U.S. economist of IDEAglobal in New York.

A Fed source, who asked not to be named, said the central bank was aware credit market strains had grown worse and said it was actively considering ways to ease the pressure.


In a statement outlining its rate decision, the Fed had noted financial strains had increased in recent weeks, but it also said some inflation risks remain.

It refrained from offering its usual assessment of the balance of risks facing the economy, catching some economists off guard who had looked for the Fed to underscore its concerns about weakening economic growth.

"Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation," it said.

The Fed has now cut overnight rates, their key economic policy lever, by a full percentage point since mid-September in an effort to put a floor under an economy increasingly seen at risk of falling into recession. "Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time," the Fed said.

Boston Federal Reserve Bank President Eric Rosengren dissented against the decision, preferring a half-point reduction in the federal funds rate.

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