WASHINGTON, Sept 19, 2007 (AFP) – A bold half-point rate cut by the Federal Reserve will give the ailing US economy a shot in the arm, but runs the risk of stoking inflation and appearing to bail out speculators, analysts say. Tuesday’s cut in the federal funds rate to 4.75 percent is seen as a pre-emptive strike to avert a prolonged downturn or recession, amid a realization that the woes from housing and a squeeze in credit are spreading.
The Federal Open Market Committee headed by Ben Bernanke “looks like it is finally getting it,” said Joel Naroff, of Naroff Economic Advisors.
“After consistently underestimating the extent of the slowdown in housing and the implications of the subprime meltdown, the committee moved aggressively to start addressing the constraining effects of the credit crunch.”
The Fed appeared to be justified by the latest economic news. On Wednesday, the government said US housing starts fell to a fresh 10-year low and consumer prices were down 0.1 percent in August as energy prices retreated.
The cut in rates is likely to reduce a range of borrowing costs including business and consumer loans, and in some cases, the costly upward “resets” for adjustable-rate mortgages (ARMs) that could