Federal Reserve rate cut challenges BoE

by Gill Montia

Story link: Federal Reserve rate cut challenges BoE

America’s central bank, the Federal Reserve, has reduced interest rates by half a percentage point.

The move is seen as an attempt to prevent the global credit crisis leading the US economy into recession.

The decision by the central bank was unexpected and will put pressure on the Bank of England to reduce interest rates in the UK.

If successful, the Federal Reserve’s strategy could help end the turbulence on the money markets and halt further increases in the cost of borrowing.

Speculation exists over the whether the decision was taken as a result of the Northern Rock crisis, which could be replicated across the US if the credit squeeze persists.

The news came 24 hours after the Chancellor of the Exchequer issued a guaranteed to Northern Rock savers that their funds would be safe.

The rate cut by the Federal Reserve should mark the return of cheaper money to the markets.

This can only be good news for homeowners, as UK mortgage rates are already at their highest for nine years.

However, economists are cautious and suggesting that while the actions of the Chancellor and the Federal Reserve may delay the recessionary cycle for a year or so, the delayed outcome could increase in severity.