Fed slashes interest rate by half percentage point

The Fed's action reversed its current policy on interest rates, which had been to hold them steady out of concern that more cuts would fuel inflation. Since Fed Chairman Ben Bernanke and his colleagues put a stop to interest cuts in June, economic and financial conditions have deteriorated significantly.

By TOM RAUM and JEANNINE AVERSA
The Associated Press

10/8/2008

WASHINGTON — The Federal Reserve on Wednesday cut a key interest rate by 0.5 percent, striving once more to steady reeling financial markets just days after President Bush signed a $700 billion bailout bill into law.

The Fed said it was lowering that rate to 1.5 percent, noting that it was acting in concert with central banks overseas.

It was the latest in a long series of actions, over the last several weeks, that the Fed has taken in coordination with other federal agencies, Congress and the White House to shore up a financial industry stung by bad loans, mounting losses and — in many cases — collapse.

The Fed's action reversed its current policy on interest rates, which had been to hold them steady out of concern that more cuts would fuel inflation. Since Fed Chairman Ben Bernanke and his colleagues put a stop to interest cuts in June, economic and financial conditions have deteriorated significantly.

"The pace of economic activity has slowed markedly in recent months," the Fed said "Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

Although inflation has been high, the Fed believes that the recent drop in energy prices and the weaker prospects for economic activity have reduced this threat to the economy.

In Europe, which also has been hard hit by the financial crisis, the Bank of England cut its rate by half a point to 4.5 percent, while the European Central Bank sliced its rate to 3.75 percent.

In addition, the Fed reduced its emergency lending rate to banks by half a percentage point to 1.75 percent. Given the intense credit crisis, banks have been ramping up their borrowing from the Fed's emergency "discount" window.