May 2008 News Update

FED CUTS RATES AGAIN, AND HINTS AT PAUSE

The US Federal Reserve has, as expected, cut interest rates by a modest quarter percentage point. The decision by Fed Chairman Ben Bernanke and his policymakers may have been influenced by GDP increasing at a faster than expected pace in the first three months of the year.

Trying to stop the world's biggest economy slipping into recession, the US central bank has slashed its benchmark rate over the last eight months from 5.25% to 2%.

However the cuts are not getting through to home owners. The average US 30-year fixed mortgage is 6% and adjustable mortgage rates have risen during that time. Existing home prices continue to slide and foreclosures have surged.

The fed funds rate, as it is more commonly known, is a benchmark for home equity lines of credit, credit cards and other consumer loans as well as the prime rate used for short-term business loans.

The Fed's statement repeated earlier ones about how rate cuts up to this point should help to spur the economy and lessen the risk of a downturn. But the central bank removed the following language form the current statement: "downside risks to growth remain."

The latest GDP figures, which show the US economy grew by 0.6% in the first quarter, seem to indicate that that economy is struggling but still growing. But they were not solid enough to end the debate on whether the country is sliding into recession.

The question now is whether the Fed will pause in its rate cutting campaign. Some analysts said that would be a positive sign, indicating the US economy has steadied with the worst of the market turmoil over, but other fear that things could turn negative again in the second quarter.