The United States Federal Reserve cut interest rates by 25 basis points yestersday, but said the risk of inflation was roughly equal to downside risks to growth, suggesting further rate reductions are far from a sure bet.
The decision by the central bank's Federal Open Market Committee (FOMC) to lower the overnight federal funds rate by a quarter-percentage point to 4.5 per cent was widely expected in financial markets.
In announcing its decision, which follows an aggressive half-point reduction in rates made last month, the policy-setting FOMC said its actions should put the economy on better footing and had brought inflation and growth risks into rough balance.
"Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time," the central bank said.
U.S. stocks pared gains, but revived later, while prices for U.S. government debt extended losses as traders saw the Fed's statement as suggesting a lower likelihood of further rate cuts. The value of the dollar showed little change.
In late afternoon trading, the Dow, which had dipped briefly into negative territory after the decision, rose 138.92, or 1.01 per cent, to 13,931.39.
Broader stock indicators ad-vanced. The Standard & Poor's 500 index rose 18.33, or 1.20 per cent, to 1,549.35, and the Nasdaq composite index rose 40.85, or 1.45 per cent, to 2,857.56.
Oil futures soared again yesterday to a new record near US$95 a barrel after the government reported another unexpected drop in crude oil inventories and the Federal Reserve cut interest rates by a quarter point.
Light, sweet crude for December delivery rose $4.15 to settle at US$94.53 a barrel on the New York Mercantile Exchange after rising as high as US$94.74, a new trading record.
TENSION IN THE RANKS
The Fed's vote was not unanimous. Kansas City Federal Reserve Bank President Thomas Hoenig dissented, preferring to hold borrowing costs steady.
"Recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation," the Fed said. "In this context, the committee judges that some inflation risks remain."
"After this action, the upside risks to inflation roughly balance the downside risks to growth," it added.
Prices for U.S. interest rate futures contracts showed dealers were scaling back bets on further rate cuts on the back of the Fed's announcement, implying a 50 per cent chance the Fed will lower rates again in December down from 64 per cent overnight.
Credit markets which were roiled in August as concerns mounted over rising delinquencies in the U.S. mortgage market, have regained some stability since the Fed lowered rates by a half-percentage point on September 18.
Fed officials have said they expect the housing slump and the after-effects of tighter credit to weigh on the economy into next year.
