Fed cuts key interest rate half-point to 1 percent

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Even consumers who would like to spend are having trouble doing so because of a shortage of credit available from banks, the Fed noted. “The intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

The rate cuts and numerous other Fed maneuvers pumping money into the banking system this year have been aimed at restoring health to the credit markets and encouraging banks to lend more. Nevertheless, a monumental retrenchment in financial markets has persisted since mid-September, with only moderate responses to the Fed’s ministrations.

Financial markets responded mildly to the Fed’s rate cut, which was largely anticipated. The Dow Jones Industrial Average ended down 74 points.

Because of the pervasive fears that are freezing up financial markets, some analysts questioned whether the Fed’s rate cut would do much good.

“It does not address the leverage and credit issues in the banking system” which are stymieing lending, while it “penalizes savers,” who are earning miniscule interest rates on their savings deposits, said Martin Hutchinson, analyst at Breakingviews.com.

Joachim Fels, economist with Morgan Stanley, said the strenuous efforts of the Fed and other world central banks are needed, however, and eventually will bear fruit.

“Monetary policy will eventually get traction, though the timing is highly uncertain,” he said. “And if the policies used so far don’t work, we believe the central bank and government won’t shy awway from even more unorthodox measures.”

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