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Federal Reserve slashes US rates Federal Reserve slashes US rates
(20 minutes later)
The Federal Reserve has cut US interest rates sharply in a bid to restore confidence to nervous financial markets and boost the ailing economy.The Federal Reserve has cut US interest rates sharply in a bid to restore confidence to nervous financial markets and boost the ailing economy.
The central bank lowered rates to 2.25% from 3%, but the cut was smaller than financial markets had been expecting. The central bank lowered rates to 2.25% from 3%, but the cut was smaller than financial markets had expected.
The Fed has taken strong action this week to avert a financial panic after investment bank Bear Stearns was forced into a fire sale to avoid collapse.
Many economists believe the US economy is already in a recession.Many economists believe the US economy is already in a recession.
The Fed has taken strong action this week to avert a financial panic after investment bank Bear Stearns was forced into a fire sale to avoid collapse.
US Treasury Secretary Henry Paulson admitted earlier on Wednesday that the US economy was facing a "sharp decline" at the moment, but hoped for a recovery later in the year.US Treasury Secretary Henry Paulson admitted earlier on Wednesday that the US economy was facing a "sharp decline" at the moment, but hoped for a recovery later in the year.
The Fed has lowered rates five times since mid-September in a bid to boost the economy, which is reeling from credit crisis that was triggered by a slump in the US housing market. The Fed has now lowered rates six times since mid-September in a bid to boost the economy, which is reeling from the credit crisis that was triggered by a slump in the US housing market.
"Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity," the Federal Reserve said."Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity," the Federal Reserve said.
US stocks trimmed sharp gains after the announcement.
Recession fears
The Fed is hoping its actions will stave off both a recession in the wider economy and go some way to ease unprecedented conditions in the financial system.
"The cut continued the Fed's efforts to calm the markets after the steps they took over the weekend with Bear Stearns and to calm the market's fears," said K. Daniel Libby at Sands Brother Select Access Fund.
"The Fed has shown that they are focused on getting the economy back on its feet first and foremost, and they will worry about inflation later," he said.
"There can be no health in the economy until the banking system is working properly."
Banks have been unwilling to lend to each other because they are worried about losses on investments backed by US mortgages.
Those investments have been hit by the slump in the US housing market.