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Fed cuts rates for second time in nine days

The Federal Reserve cut interest rates again last night in a second bid to avoid a recession in the US.

The central bank deliberated for two days but decided to reduce rates from 3.5 per cent to 3 per cent. Last week the cost of borrowing was slashed by .75 per cent from 4.25 to 3.5 which was the largest one-off cut for 25 years.

The Federal Open Market Committee said after the vote: “Financial markets remain under considerable stress and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labour markets.”

M&G fund manager Richard Woolnough says: “The Federal Reserve is slashing interest rates very aggressively in view of the collapsing US housing market and the threat of economic growth falling sharply. US house prices fell 7.7 per cent in the year to the end of November 2007, the steepest fall since the index began in 1987. The Fed is acutely aware of the risks to the economy and it will be well aware that a falling US housing market has always historically resulted in or coincided with a recession.”

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