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Fed slashes interest rates again after US house prices cave in

The US Federal Reserve slashed interest rates again last week for the second time in nine days.

This time, it took 50 basis points off the 3.5 per cent Fed Funds rates it set the previous week when it cut by 75 basis points from 4.25 per cent to 3.5 per cent, the biggest single cut for 25 years.

The federal open market committee said: “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 rates very aggressively in view of the collapsing US housing market and the threat of economic growth falling sharply.

US house prices fell by 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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