Aggressive US Fed cuts key rate by a half-point to 1 per cent

The central bank on Wednesday reduced its target for the federal funds rate, the interest banks charge on overnight loans, to 1 per cent, a low last seen in 2003-2004. The funds rate has not been lower since 1958, when Dwight Eisenhower was president.

The cut marked the second half-point reduction in the funds rate this month. The Fed slashed the rate by that amount in a coordinated move with foreign central banks on October 8.

In a brief statement explaining Wednesday’s action, the Fed said the “intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and business to obtain credit”.

The central bank said it had room to lower rates because the spreading economic weakness was lowering the risks that Inflation would get out of control. Indeed, the weakness has caused dramatic declines in the price of Oil and other commodities.

The Fed’s action is expected to be quickly followed by a reduction by commercial banks in their prime lending rate, the benchmark for millions of consumer and business loans, by a similar half-point.

While Fed policy makers now have less room to maneuver on interest rates if the economy deteriorates further, investors had been hoping for the relatively aggressive cut as a sign of vigilance among American central bankers seeking to restore the free flow of credit. The move brought the rate down to near the lows reached in 2003 and 2004.

China, which has said it would not fall victim to the crisis, also cut its interest rate to 6.66 percent from 6.93. The People's Bank of China said it would take effect on Thursday. Norway also cut rates on Wednesday, Japan may cut on Friday and the European Central Bank and Britain are expected to add to the easing next week as authorities remain fearful that the worst financial crisis in 80 years will cause a long global recession.