Federal Reserve cuts key interest rate another 0.25%
At 2%, the federal funds rate is at its lowest level since late 2004. The decision comes as preliminary data from the Commerce Department shows the economy slowing to a crawl in the first quarter.
WASHINGTON — The Federal Reserve sliced another 0.25% off its benchmark overnight lending rate today, but warned that inflation concerns may make further rate cuts unwise.
The Fed's rate-setting open market committee lowered the federal funds rate to 2% -- its lowest rate since late 2004. The central bank also lowered the rate it charges financial institutions for direct loans by 0.25% to 2.25%.
The central bank has been aggressively cutting interest rates since last summer in an effort to spur economic growth and keep capital flowing into financial markets that nearly collapsed as a result of the ongoing housing and credit crisis.
"Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further," the Fed committee said in a statement. "Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters."
However, loosening credit too much raises the risk of inflation, something that clearly worries Fed governors. Two members of the committee's 10 members voted against the cuts, preferring to leave the rates unchanged.
"Although readings on core inflation have improved somewhat, energy and other commodity prices have increased and some indicators of inflation expectations have risen in recent months," the committee said. " . . . Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully."
Joshua Shapiro, chief U.S. economist with MFR Inc., a New York-based forecasting firm, said "the key difference in the policy statement was the omission of 'downside risks to growth remain.' This indicates that as long as economic events unfold broadly as the Fed expects . . . policymakers expect the federal funds target to remain at 2% for some time."
The Fed rate cut came as the economy slowed to a crawl in the first three months of this year, with gross domestic product growing just 0.6% for the second quarter in a row, according to advance data released today by the Commerce Department.
The anemic growth was consistent with expectations by analysts who have been predicting an economic slowdown or shallow recession for much of this year.
"There is no end in sight to the economic slump -- 2008 will be a year of recession or near-recession conditions," Shapiro said.
