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The Federal Reserve cut interest rates in the United States for the third time in as many months and acknowledged that the economy had begun to slow down markedly.
But the quarter-point cut was less than many in the market said was needed to forestall a recession and to head off the worst effects of the continuing crisis in credit markets.
One member of the Fed's open markets committee, Eric Rosengren of the Boston Fed, dissented from the decision saying that a 50 basis point cut would have been better.
The Fed, led by its chairman, Ben Bernanke, is wrestling with how to restore life to the credit markets, to consumer confidence and to the ailing US housing market without reigniting inflation in some corners of the economy. Unlike after its last meeting at the end of October, the Fed did not say that the risks to the economy were balanced between inflation and slower growth, it did point out that fuel and commodities prices remained high.
The cut takes the main Fed funds rate to 4.25 per cent, a full percentage point below its level when the reductions began in September. Financial markets expect further cuts in the new year.
John Lonski, the chief economist at Moody's Investors Service in New York, said it was clear there was a disagreement between the Fed and the financial markets about the seriousness of the risks to economic growth.
"By cutting only 25 basis points, the Fed effectively conveys its sense that recession risks are not as great as market participants believe," he said.
"The shallowness of the rate cut is somewhat surprising given that the economic outlook has worsened since the 31 October. All of this is to suggest that the Fed is fairly confident that what lies ahead for the US economy is nothing worse than a rough patch."
In a second disappointment to the market, it also cut the so-called "discount rate" at which it lends money into the banking system by just 25 basis points. A more aggressive cut had been predicted as a way to encourage banks to use the Fed as a lender of last resort and kick-start inter-bank lending. Banks are less keen to lend to each other while the scale of losses on sub-prime mortgages remains unclear, and activity in the credit markets has slowed to a crawl as a result, in turn causing funding problems for all sorts of businesses that rely on the credit markets for short-term finance.
Bond traders disagree about whether Fed rate cuts in themselves will encourage banks to start lending again, particularly before the critical year-end accounting period has passed.
Ken Landon, a foreign exchange strategist at JP Morgan Chase, said the more hawkish than expected tone of the Fed's accompanying statement was bearish for equities but would help strengthen the dollar.
- Independent
