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Analysts laud US Fed's 75bps rate cut

Delivering a finely tuned rate cut and message, the US Federal Reserve appeared to instill fresh confidence that it can tackle a global credit crisis and steer the US economy through its turmoil, analysts said.

The central bank lowered the federal funds rate 75 basis points to 2.25 percent, defying market expectations for a full percentage point cut, in the latest move in an all-out effort to fight the mushrooming crisis.

The Federal Open Market Committee (FOMC) was divided, voting 8-2 in favor of the rate cut and issuing a statement that highlighted inflation risks. Still, the Fed left the door open to further cuts if needed.

"The Fed may have given us the best of both worlds. We get a large rate cut of the sort that the markets wanted. Yet we got restraint and that is what a dissent can do on the FOMC," said Robert Brusca at FAO Economics.

Brusca added that dissent in the vote "says that despite the easing the Fed is not forgetting about inflation and does that louder than any boilerplate language in the FOMC statement."

Stock markets rallied strongly amid hopes the Fed action would revive a sputtering US economy and ease a global credit crunch. The Dow Jones industrials surged 3.5 percent, or 420 points.

Scott Anderson, an economist at Wells Fargo, said the central bank wanted to send a message that it was being bullied by the markets into cutting rates more than needed.

"The Fed wanted to remind the market that it is in charge of the federal funds rate and not the futures market," Anderson said.

Anderson said the Fed could not ignore the slide in the US dollar and surge in commodities prices in reaction to the latest rate cuts.

"The Fed wants to cushion the turmoil in markets but they don't want to write a blank check," Anderson said. "They want to remind the market there is no free lunch, that there is going to be some pain. And they need to save their ammunition in case there is another Bear Stearns or other problems down the road."

Battling the economic downturn and a credit crunch among banks, the Fed has now slashed its federal funds rate by 300 basis points from 5.25 percent last September, in an effort to ease housing and credit market stress. It has also used a variety of tools to pump liquidity into markets.

"The Fed is rapidly using up all its bullets but there is no other choice," said Joel Naroff of Naroff Economic Advisors.

"It will probably have to use more up before the coast is clear. Ultimately, I believe the Fed will succeed in keeping us out of a steep and protracted recession and I still feel that the economy will be up and running by the end of the year," he said.

The reduction lowers a wide range of borrowing costs for consumers and businesses. Most commercial banks followed the Fed move with a reduction in their prime rate to corporate customers.

The Fed also cut its discount rate for direct loans to banks, and now available to some securities firms, by a similar amount, bringing the rate to 2.5 percent.

The moves marked the latest in a multi-pronged effort by the Fed headed by Chairman Ben Bernanke to keep credit flowing and markets functioning to avert an economic meltdown.

The massive amounts of cash pumped into subprime loans by banks and securities firms worldwide have left those firms exposed to huge losses and resulted in the spectacular demise last week of Wall Street giant Bear Stearns, bought by JPMorgan Chase with help from the Fed for a bargain-basement price of US$2 a share.
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