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Fed Cuts Key Interest Rate by Quarter-Point

Robert Siegel talks with economist Stephen Cecchetti on All Things Considered

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The Federal Reserve cut a key interest rate by a quarter-percentage point Tuesday to 4.25 percent in an effort to buoy a U.S. economy battered by tighter credit and a continuing mortgage crisis.

The third cut in as many months was widely expected, and is seen as an effort by the central bank to head off a recession by freeing up credit and reassuring wary consumers, many of whom are carrying considerable credit-card debt.

Fed officials signaled that further cuts are possible if a severe downturn in housing and a crisis in mortgage lending get worse.

The move was expected to prompt commercial banks to trim their prime lending rate, which would reduce the benchmark rate for millions of consumer and business loans to 7.25 percent.

In addition to cutting the funds rate, the Fed announced it was reducing its discount rate, the interest it charges to make direct loans to banks, by a quarter-point, as well, to 4.75 percent. This reduction was aimed at encouraging banks to borrow more freely from the Fed rather than severely tightening credit.

The latest round of cuts began in September in response to severe turbulence in credit markets around the globe as investors reacted to various reports of mounting losses from defaults in subprime mortgages, the latest fallout from the worst slump in the U.S. housing market in more than two decades.

After cutting the funds rate by a half-point on Sept. 11 and a quarter-point on Oct. 31, the central bank indicated that those two reductions might be all that were needed to combat the threat of a recession given that financial markets appeared to be stabilizing.

However, increased market turbulence following the October meeting and growing fears of a recession caused the Fed to do an about-face.

From NPR reports and The Associated Press