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31 Jan, 2008 04:43

U.S. Fed cuts rate further to prevent recession

The U.S. Federal Reserve has cut its key interest rate to 3 per cent in an attempt to provide some relief to the volatile financial markets and encourage economic growth. The widely-expected move caused U.S. stocks to initially rally but they reversed tho

Just over a week after cutting its federal funds rate by a hefty 75 basis points, the U.S. Federal Reserve has cut it by a further 50. 

Financial experts tend to support the Fed's rate cuts as they boost liquidity but some say whatever U.S. policymakers do, a recession is inevitable. 

“Both economies and markets evolve in cycles. To my mind, the mortgage crisis which triggered the current financial crisis is a cycle to be accompanied by recession. It’s hard to predict how deep it will go, but it is a reality,” said Nikolay Berzon from Moscow's Higher School of Economics. 

The U.S. government is taking action to boost the ailing economy and is discussing a stimulus package proposed by President Bush, which would provide Americans with up to $US 600 each in tax rebates. 

Some analysts, though, doubt the politicians' motives. 

“The economic stimulus package is a bit of a joke really as it’s clearly a political tool for both parties to try and win votes. What we really need is for the U.S. state to convince all the banks to understand how much they've lost, how big their debts are, to clean the system and let the system grow on its own,” said Ronald Smith, Chief strategist at Alfa Bank. 

But things look set to get worse before they get better. The Fed says that for some businesses and households, credit has continued to tighten since its last cut. 

And data released this week shows the economy grew by just 0.6 per cent in the last quarter of 2007 which puts growth for the whole year at the lowest level since 2002.