The Federal Reserve cut its benchmark interest rate by a quarter-point to 4.25 percent to prevent the housing slump and credit squeeze from undoing the six-year expansion.
"Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation,'' the Federal Open Market Committee said in a statement after meeting yesterday in <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Washington. The change "should help promote moderate growth over time.''
Stocks fell and Treasury notes advanced after the decision, which some economists said fell short of what's needed to spur lending and avert a recession. The central bank also pared the discount rate, the cost of direct loans from the Fed, by a quarter-point to 4.75 percent. Some analysts predicted a bigger reduction.
"If things deteriorate they will cut again,'' said Stephen Cecchetti, professor of international economics at Brandeis University in Waltham, Massachusetts, and a former director of research at the New York Fed. "If financial conditions don't start to improve dramatically,'' they might have to cut before the next meeting scheduled for Jan. 29-30, he said.