US banks follow suit, markets bounce back, but fears remain

The Federal Reserve cut its target for the federal funds rate 75 basis points to 2.25 % in a move to counter a credit crisis that’s leading to fears of a recession.

The Fed announced: ‘Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.’

‘Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity.'

However, downside risks to growth remain, said the Fed, which also warned that expectations of inflation have risen.

Swiss Re's US senior economist, Arun Raha, called the Fed’s actions a ‘forceful move in its attempts to alleviate the liquidity crunch and to shore up a rapidly weakening economy.’

He added: ‘It clearly does not believe that the action it took last week to expand its securities lending program, or its emergency measures over the weekend to increase market liquidity are enough.’

‘The economy is in or close to a recession,’ said Raha. ‘But increasing oil prices have kept inflationary pressures from abating, complicating the Fed's task. However, inflation is expected to ease as economic activity slows, albeit with a lag, so the Fed is likely to cut further if the economy continues to weaken.’

Most US banks followed suit, Bank of America, LaSalle Bank, Wells Fargo Bank, Wachovia Corporation, SunTrust Bank, and others all lowered their prime-lending rates to 5.25 % from 6 %.

Stocks bounced back on Tuesday with Wall Street experiencing its biggest daily gains since July 2002.

The prime rate is a benchmark used to set interest rates on various forms of corporate and consumer credit. It is one of several interest rate bases used by the banks, which lend at interest rates above and below the prime rate.

The prime rate last changed on Jan. 30, 2008.