FACED with growing warnings of recession, the US Federal Reserve cut interest rates last night by a quarter percentage point to 4.25 per cent.
The cut in the federal funds rate is the third in the past three months by the world's most powerful central bank. And Fed officials signalled that further cuts were possible if the downturn in housing and the crisis in mortgage lending were to get worse.
In addition to cutting the funds rate, chairman Ben Bernanke announced the Fed was reducing its discount rate, the interest it charges to make direct loans to banks, also by a quarter-point, to 4.75 per cent. This reduction was aimed at encouraging banks to borrow more freely from the Fed at a time when there are worries that a rising number of bad loans will prompt banks to tighten credit conditions too severely, adding another strain on the already fragile economy.
Commercial banks were expected to match the latest reduction by trimming their prime lending rate - which would reduce the rate for millions of consumer and business loans to 7.25 per cent.
Shares on Wall Street fell on the news as many had been urging a half-point cut, citing growing pressure in wholesale money markets and a loss of earnings momentum. But recent figures showed more jobs were created in November than had been expected.
Rates have come down from 5.25 per cent in September, and further cuts are expected.
The Fed's decision came as the chief of government-sponsored mortgage provider Freddie Mac said it will lose an additional $5.5 billion (2.7 billion) to $7.5 billion (£3.7 billion) over the next few years as the housing crisis worsens and home-loan defaults rise.
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