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Fed cuts rates again - 31 January 2008

Domestic concerns continue to dominate news in the US as the Federal Reserve decided to cut rates for the second time in nine days, this time by a further half a percentage point to bring the rate down to 3 per cent.

The news is intended to prevent the US economy from sliding into recession, and follows the biggest cut in 25 years announced last week. The depth of concern for the immediate future of the US economy is highlighted by the fact that the Fed has now slashed rates by some 1.25 points this year.

A general slowdown in the domestic housing market, along with shrinking manufacturing figures and the global stock market volatility are to blame for making these cut necessary. Many analysts expected a further cut this week from the US authorities, but most have been surprised by the size of this latest drop.

Some observers have accused the Federal Reserve of running scared of the short-term ambitions of the financial markets, stating that the initial drop of three-quarters of a point in the interest rates will take some time to filter through the economy, and by cutting the rates by a further 50 basis points, the Fed have left themselves very little room for manoeuvre in the future. Should the economy not come out of the present slump through these measures, there will be little left that the government can do in order to stimulate the markets.

This the fifth cut in interest rates in the US since September 2007, and with the housing market continuing to slow and signs of ‘softening’ in the labour market, the signs for an early recovery domestically are not great.

Overseas buyers can take advantage of the drop in rates to a certain extent, should they be looking for a US mortgage to buy a home Stateside. Developers are offering some great deals on unmoving stock, leaving the way clear for investors to mop up some of the best properties at huge discounts.

 

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