WASHINGTON : The US Federal Reserve on Friday cut the interest rate it charges commercial banks in a surprise move marking its most decisive action since the financial markets became gripped by fears over a global credit crunch. The Fed said it had lowered the rate it levies on loans to banks by 50 basis points to 5.75 percent, citing "increased uncertainty" in the financial markets.
"Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward," the Fed cautioned in a statement.
The central bank lowered the so-called "discount" rate to help soothe the US banking system which has been stressed in the past week by a credit crunch linked to the distressed housing market.
It is extremely unusual for the Fed to act outside of its scheduled rate meetings and the last time it did so was on September 17, 2001, after the terror attacks that targeted New York and Washington.
Dow Jones Industrial Average futures trading jumped sharply in the wake of the Fed's announcement, surging 231 points to around 13,175 points at 1319 GMT, ahead of the formal opening of trading on Wall Street.
The central bank's move does not affect its key short-term federal funds interest rate which stands at 5.25 percent.
The Fed - which has also injected tens of billions of dollars into the stretched financial system in the past week - said it had trimmed its discount rate in a bid to restore "orderly conditions in financial markets" which have been rocked by credit fears and the troubles plaguing the housing market.
"Although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably," the Fed said.
The central bank said it was continuing to monitor the situation and that it was ready to act as necessary "to mitigate the adverse effects on the economy arising from the disruptions in financial markets."
The central bank's move was approved by Fed chairman Ben Bernanke and other Fed governors.
"This step is a considerable move to inject liquidity into the system well beyond the previous liquidity injections," said Stephen Gallagher, an economist at Societe Generale.
"This step shows a commitment to restoring liquidity rather than broadly reflating the economy," Gallagher said.
The Fed said it was also extending the repayment period on what are typically overnight loans for as long as 30 days to help ease tightening credit conditions further.
US banks have tightened their lending practices in recent weeks as the financial storm affecting mortgage firms has worsened and many investors have shunned mortgage-backed securities amid a jump in home foreclosures.
"Effectively, the discount rate cut, along with the Fed's second announcement of an extended term loan availability, has provided unlimited reserves to banks over this weekend and for the month ahead if needed," said John Silva, a chief economist at Wachovia Corporation.
"(The) Fed has effectively eased through the back door," Silva said, adding "it is not clear if there is a single bank problem or if this is a response to general liquidity shortage." - AFP/ch
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