US Central Bank Cuts Key Interest Rate

By Michael Bowman

Washington

22 January 2008

The U.S. central bank has slashed a key interest rate amid a global market upheaval sparked by fears of a possible U.S. recession. VOA's Michael Bowman reports the Bush administration has also renewed calls for a swift economic-stimulus package to spur growth.

The interest-rate cut is the biggest by the Federal Reserve since the aftermath of the terrorist attacks of 2001. The United States, the world's biggest economy, is suffering slower economic growth, higher unemployment, and continued weakness in the housing market.

Late Monday, U.S. central bank officials decided to cut the federal funds rate, the interest that banks charge each other on overnight loans, by three-quarters of a percent, to 3.5 percent. In a statement, the Fed said it decided to act in view of a weakened economic outlook and increasing risks to growth.

Financial markets from Asia to Europe to the Americas plunged Monday while U.S. markets were closed for a national holiday. Many markets around the world suffered losses again Tuesday before the Fed action.

Lower interest rates make it easier for businesses and consumers to borrow money for purchases and other economically beneficial activities.

But one economist, David Weiss of the credit-rating agency Standard and Poor's, notes that it can take months for the impact of interest rate changes to be felt.

"One problem for the economy is anything the Fed does now affects the economy about nine months from now," he noted. "The recession will probably be over by then. It [the interest rate cut] will be helping with the recovery, not preventing the recession at this point."

Meanwhile, efforts continue in Washington to craft an economic stimulus package. Treasury Secretary Henry Paulson, is urging Congress to work with the administration to devise a package that will boost U.S. consumer spending and business investment.

"We need to do something now, because the short term risks are clearly to the downside, and the potential benefits of quick action to support our economy have become clearer," he said. "Time is of then essence here, and the president stands ready to work on a bipartisan basis to enact economic growth legislation as soon as possible. The legislation that will best serve our economic interests must be swift, robust, broad-based, and temporary."

Paulson was speaking at the U.S. Chamber of Commerce.

Stimulus packages usually consist of a boost in government spending, tax cuts or both. The combination of aggressive interest-rate cutting and cries for stimulus is widely viewed as a sign that Washington is bracing for a tough economic road ahead. Yet Secretary Paulson stressed there is no cause for panic.

"I continue to have confidence in the underlying strength of the global economy. The U.S. economy is resilient, unemployment remains low, and job creation continues, albeit at a modest pace," he added. "The structure of our economy is sound, and our long-term economic fundamentals are healthy."

The United States remains a key engine for global economic growth, yet some economists have suggested that rising economies in China, India and elsewhere are reducing the extent to which the world relies on U.S. economic health for worldwide prosperity. But current global market upheaval is casting doubt on the theory, according to Crystia Freeland, U.S. managing editor of The Financial Times.

"This hope that other parts of the world were now big enough and strong enough to pull up the global economy even when you had a U.S. slowdown, that seems not to be happening," noted Freeland. "What used to be said is that when America sneezes, the world catches a cold, and that still seems to be true."

The interest rate cut did not prevent U.S. financial markets from plunging after the opening bell, although losses were less severe by midday. Oil prices also declined.