By DPA
Washington : The US central bank has slashed key interest rates for the second time in nine days to calm financial markets and buoy the economy after US economic growth slowed sharply late last year.
The announcement of a 0.5-percentage-point cut to 3 percent by the Federal Reserve Board came Wednesday just hours after news that US economic growth had decelerated considerably, to 0.6 percent annualised, in the fourth quarter of 2007 – about half the rate that had been anticipated.
“We’re not happy with the number,” Commerce Secretary Carlos Gutierrez told Bloomberg Television after the growth report. “We need a booster shot before the economy gets sick.”
While the move by the Federal Open Market Committee to loosen monetary policy was in line with Wall Street expectations, it had little effect on the New York Stock Exchange, where stocks fell across the board.
The Fed cited the stress in financial markets, plunging housing values and climbing unemployment to justify Tuesday’s rate cut.
The interest rate cut is the latest step to halt plummeting growth and counteract the effects of the broadening subprime mortgage crisis that has eroded US consumer spending and spread financial trouble to global markets and foreign banks.
On Tuesday, the US House of Representatives approved an emergency economic stimulus package that includes more than $146 billion in tax relief designed to encourage spending and investment.
The Senate is considering a different measure, to the impatience of the White House.
“Whatever the Senate does, they should not delay this package,” said US President George W. Bush, in California on a four-state trip to discuss trade and other issues from his State of the Union address Monday.
Last week, the Federal Reserve held an emergency session to lop off 0.75 percentage points from the interest rate.
The US economy slowed to 0.6 percent growth on an annual basis in the October-December period, after a robust 4.9 percent growth rate in the third quarter. The fourth quarter dragged down annual growth for 2007 to about 2.2 percent, the lowest in five years.
The possibility of a US recession dominates economic discussions in the US and was at the top of the agenda at the World Economic Forum last week in Davos, Switzerland.
Harvard economist Martin Feldstein, who heads the prestigious National Bureau of Economic Research, greeted the Fed’s easing of monetary policy as another move that could soften the blow from the recession he still anticipates.
“It is more likely we will have a recession than not,” Feldstein said in broadcast remarks. “If we do go into a recession, these moves will be enough to keep it from becoming a deep one.”
There was some positive economic news earlier this week, with stocks rising Monday and Tuesday on news of an unexpected monthly spike in orders for durable goods.
The meagre fourth-quarter growth reflected a 24 percent plunge in home construction, the biggest drop since the last three months of 1981. That drop alone subtracted 1.2 percentage points from growth, the US Commerce Department said.
A drop in automotive production subtracted another 0.9 percentage points compared to the third quarter. Consumer spending, which accounts for more than two-thirds of the economy, grew at only 2 percent from October to December.
Imports slowed to a 0.3 percent growth rate.
The Federal Open Market Committee, which voted nine-to-one for the rate cut, was optimistic that inflation would be moderate in the coming quarters, which helped justify the rate cut.
“Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” the committee said in a statement. “Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labour markets.”
With the US accounting for 21 percent of the global economy, the Washington-based International Monetary Fund Tuesday reduced its expectations for 2008 world economic growth to 4.1 percent, down from the original forecast of 4.8 percent, citing the negative effect of the US mortgage and financial crisis.
The Commerce Department will release a series of revised figures for the fourth quarter starting on Feb 28.