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| Fed cuts interest rate to 4.75% | Fed cuts interest rate to 4.75% |
| (40 minutes later) | |
| US interest rates have changed for the first time since mid-2006, reduced from 5.25% to 4.75%, an unforeseen 0.5% cut which shot shares to four year highs. | |
| Analysts had expected the Federal Reserve to cut rates 0.25% to prevent a housing market downturn and the"credit crunch" from denting the economy. | Analysts had expected the Federal Reserve to cut rates 0.25% to prevent a housing market downturn and the"credit crunch" from denting the economy. |
| By making money cheaper to borrow, people can spend and invest more, revitalising the economy, they say. | By making money cheaper to borrow, people can spend and invest more, revitalising the economy, they say. |
| Some wanted the Fed to leave rates on hold to focus on controlling inflation. | Some wanted the Fed to leave rates on hold to focus on controlling inflation. |
| The tightening of credit conditions has the potential to intensify the housing (market) correction and to restrain economic growth more generally US Federal Reserve Q&A: What the rate cut means A reduction in rates by 50 basis points would fuel inflation and lead to the "cheap money" conditions that have brought boom-and-bust to the property sector, they had argued. | The tightening of credit conditions has the potential to intensify the housing (market) correction and to restrain economic growth more generally US Federal Reserve Q&A: What the rate cut means A reduction in rates by 50 basis points would fuel inflation and lead to the "cheap money" conditions that have brought boom-and-bust to the property sector, they had argued. |
| However immediately after the decision was announced US stocks rallied, with all three major indexes up more than 1%. | However immediately after the decision was announced US stocks rallied, with all three major indexes up more than 1%. |
| And at close the Dow Jones industrial average was up 2.51% at 13 739.39, the S&P 500 Index was up 2.92% at 1,519.78, and the Nasdaq was up 2.71% at 2,651.66. | And at close the Dow Jones industrial average was up 2.51% at 13 739.39, the S&P 500 Index was up 2.92% at 1,519.78, and the Nasdaq was up 2.71% at 2,651.66. |
| It was the S&P 500's biggest percentage gain since March 2003, and Dow average's best one-day percentage gain since 2003. | It was the S&P 500's biggest percentage gain since March 2003, and Dow average's best one-day percentage gain since 2003. |
| The Fed decision was in response to the spreading impact of credit market problems on the rest of the economy. | The Fed decision was in response to the spreading impact of credit market problems on the rest of the economy. |
| It said "the tightening of credit conditions has the potential to intensify the housing (market) correction and to restrain economic growth more generally". | It said "the tightening of credit conditions has the potential to intensify the housing (market) correction and to restrain economic growth more generally". |
| 'Economy fragile' | 'Economy fragile' |
| The size of the cut took many analysts by surprise. | The size of the cut took many analysts by surprise. |
| William Sullivan, chief economist at JVB Financial Group in Florida said: "It's difficult to interpret what the ultimate ramifications will be. | William Sullivan, chief economist at JVB Financial Group in Florida said: "It's difficult to interpret what the ultimate ramifications will be. |
| "The Fed's rate cut could suggest that the stresses in the credit markets are larger than what people thought and that the Fed thought an aggressive move was needed now." | "The Fed's rate cut could suggest that the stresses in the credit markets are larger than what people thought and that the Fed thought an aggressive move was needed now." |
| And Tim Evans, an energy analyst at Citigroup Futures in New York, said: "This confirms that the US economy is fragile and attempts to avoid a full recession by cutting interest rates may or may not be successful, but this shows that the Fed is taking the possibility of a recession seriously." | And Tim Evans, an energy analyst at Citigroup Futures in New York, said: "This confirms that the US economy is fragile and attempts to avoid a full recession by cutting interest rates may or may not be successful, but this shows that the Fed is taking the possibility of a recession seriously." |
| Inflation figures | Inflation figures |
| But there was better news for those concerned about inflation with the Producer Prices Index (PPI) for August showing a bigger than expected fall. | But there was better news for those concerned about inflation with the Producer Prices Index (PPI) for August showing a bigger than expected fall. |
| The Bureau of Labor Statistics said that the measure of the prices paid to producers of goods and services in the US fell by 1.4%, which was the biggest fall since October 2006. | The Bureau of Labor Statistics said that the measure of the prices paid to producers of goods and services in the US fell by 1.4%, which was the biggest fall since October 2006. |
| "The August PPI was good news," said Gary Thayer, chief economist at AG Edwards and Sons in St. Louis. | "The August PPI was good news," said Gary Thayer, chief economist at AG Edwards and Sons in St. Louis. |
| "There was a decline in energy prices that helped pull the overall index down and core inflation looks relatively modest," he added. | "There was a decline in energy prices that helped pull the overall index down and core inflation looks relatively modest," he added. |
| 'Won't deliver' | 'Won't deliver' |
| By cutting rates the Fed would be boosting the US economy by making it cheaper to borrow money Send us your comments | By cutting rates the Fed would be boosting the US economy by making it cheaper to borrow money Send us your comments |
| The Fed made its announcement after its one-day policy meeting. | The Fed made its announcement after its one-day policy meeting. |
| It has coincided with the imminent release of third-quarter results from a string of investment banks. | It has coincided with the imminent release of third-quarter results from a string of investment banks. |
| The first of those results, from Lehman Brothers, came in better than expected, suggesting the banks have not been hit as hard as had been thought. | The first of those results, from Lehman Brothers, came in better than expected, suggesting the banks have not been hit as hard as had been thought. |
| The Fed started raising rates from their historic low of 1% back in June 2004 to put the brakes on a US economy that was showing signs of overheating. | The Fed started raising rates from their historic low of 1% back in June 2004 to put the brakes on a US economy that was showing signs of overheating. |
| They had been on hold at 5.25% since mid-2006 after 17 consecutive rises. | They had been on hold at 5.25% since mid-2006 after 17 consecutive rises. |
| Have you been affected by the sub-prime mortgage crisis? | Have you been affected by the sub-prime mortgage crisis? |