Fed cuts rate to 1 per cent to avert 'prolonged recession'

China, Norway also bring down rates; ECB expected to loosen policy next week.

The Federal Reserve cut its benchmark interest rate by half a percentage point to 1 per cent, matching a half-century low, in an effort to avert the worst US economic downturn in the postwar era.

“Downside risks to growth remain,” the Federal Open Market Committee said on Wednesday in a statement in Washington. “Recent policy actions, including today's rate reduction, coordinated interest-rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth.”

Central bankers worldwide are trying to revive credit and stop a self-reinforcing downturn in consumer spending and bank lending from triggering a global recession. The US economy shrank at a 0.5 per cent annual rate last quarter, the most since the 2001 recession, the Commerce Department's report on gross domestic product will probably show tomorrow. Economists expect the slump to persist in the fourth quarter, according to the median estimate.

‘Worst Downturn’ ”This is probably going to be the worst downturn of the post World War II era,'' Allen Sinai, chief economist at Decision Economics in New York, said in a Bloomberg Television interview before Wednesday's announcement. “It's going to be bad, it's going to be long, it's going to be deep. We have quite a bit yet to go before we're through.”

Plunging commodity prices, including a 54 decline in the cost of oil from a record in July, have eased inflation pressures. The vote was unanimous. The Fed also lowered the discount rate a half point to 1.25 per cent.

While cutting the main rate during the past 13 months from 5.25 per cent, Fed Chairman Ben S Bernanke, 54, has created six loan programmes channeling at least $700 billion in cash and collateral into money markets as of October 22.

“This Federal Reserve has been extremely aggressive in terms of providing liquidity,” Frederic Mishkin, a former Fed governor and now a Columbia University professor, said in a Bloomberg Television interview before the announcement.

Earlier in the day, China and Norway kicked off the latest round of global interest rate cuts. Japan may cut on Friday and the European Central Bank and Britain are expected to add to the monetary easing next week as authorities remain fearful that the worst financial crisis in 80 years will cause a long global recession.

China increasingly appears to be the world's last centre of growth and has said it would not fall victim to the crisis, which has ravaged the world's financial markets. China cut its interest rate to 6.66 per cent from 6.93.

“I think this is also part of a coordinated move of global central banks to bail out the financial markets,” said Zhao Qingming, senior economist at China Construction Bank in Beijing.