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Fed considers interest rate cut Fed cuts interest rate to 4.75%
(about 1 hour later)
US interest rate-setters are gathering to decide whether to cut rates for the first time since mid-2006. US interest rate-setters have decided to cut rates for the first time since mid-2006, from 5.25% to 4.75%, more than had been expected.
Most people expect the Federal Reserve to cut rates to prevent a housing market downturn and the "credit crunch" from severely denting the economy. Analysts had expected the Federal Reserve to cut rates to prevent a housing market downturn and the"credit crunch" from denting the economy.
By making money cheaper to borrow, people would 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.
But some feel that the Fed must leave rates unchanged at 5.25% in order to focus on controlling inflation. Some wanted the Fed to leave rates on hold to focus on controlling inflation.
A reduction in rates by 25 or even 50 basis points would fuel inflation and lead to the "cheap money" conditions that have brought boom-and-bust to the property sector, they argue.A reduction in rates by 25 or even 50 basis points would fuel inflation and lead to the "cheap money" conditions that have brought boom-and-bust to the property sector, they argue.
Inflation figuresInflation 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 Q&A: US interest rate decision class="" href="/1/hi/talking_point/6995266.stm">Have you been affected by the mortgage crisis? By cutting rates the Fed would be boosting the US economy by making it cheaper to borrow money Q&A: US interest rate decision
The Fed is set to make its announcement at 1415 EDT (1815 GMT) after its one-day policy meeting. The Fed made its announcement after its one-day policy meeting.
The market may be disappointed by the announcement from Fed boss Ben Bernanke, said Bernie Schaeffer at Schaeffer's Investment Research. It has coincided with the imminent release of third-quarter results from a string of investment banks.
"Expectations for a Fed bailout are running high. It is becoming increasingly clear to me that a minimum of a 50-point cut is needed and that Bernanke is not likely to deliver on it," he said. 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.
There is also anticipation over what Mr Bernanke will say in the Fed's economic statement.
The impending decision, along with the imminent release of third-quarter results from a string of investment bank, has made traders cautious.
But 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 have 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.
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