Fed cuts rates by quarter point, sees risk of weakness

The US Federal Reserve cut key short-term interest rates by a quarter point, and said the risks of the US economy continue to be tilted toward weakness.

The Federal Open Market Committee lowered its target for the federal funds rate by 25 basis points to 3.75%, and made a 25 basis point reduction in the largely symbolic discount rate to 3.25%.

'The patterns evident in recent months - declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad - continue to weigh on the economy,' the Fed said in a statement.

'Although continuing favorable trends bolster long-term prospects for productivity growth and the economy, the Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future,' the Fed statement said.

The panel noted that the easing of the labor market and other economic conditions were 'expected to keep inflation contained.'

Commercial banks were expected to follow suit in cutting rates, and Bank of America was among the first to announce a cut in its prime rate to 6.75% from 7%.

The move marked the sixth reduction in the federal funds rate since the beginning of the year. The FOMC has now reduced the fed funds rate target for overnight lending by 275 basis points.

This is the largest cumulative amount of Fed easing since the period of June 1989 to September 1992, when the fed funds rate was cut from 9.75% to 3.0%.

The 25 basis point cut was on the smaller side of private analysts' expectations. The consensus forecast of Wall Street analysts had been moving towards a 50 basis point cut in recent days, although a number of economists retained forecasts of a 25 basis point cut.