by Anselm Waldermann

Economic growth in the United States will, in the short term, slow down. That, at least, is the future seen in the US Federal Reserve's crystal ball. The consequences of that forecast became clear on Wednesday: The central bank cut short-term lending rates by a quarter of a percentage point to 4.5 percent. The idea is to nip any possible recession in the bud.

The decision by Chairman Ben Bernanke and his board of governors was far from unexpected. Economists across the US had been anticipating the move prior to the official announcement. In the same breath, the Fed also dropped the discount rate -- which governs rates charged to banks borrowing from the Fed -- by 0.25 percent to 5 percent.

"Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance," the Fed said in a statement on its Web site. "However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction."

It didn't take long for the results to make themselves felt. Anticipation of the Fed's move had already driven the price of the euro up -- and soon after the announcement, the euro reached a new record price of $1.45 before sliding back slightly. Oil prices likewise shot up, partially due to anticipation stemming from the interest rate cut that the US economy would continue to grow. And gold prices have likewise hit $800 per ounce, a price not seen since 1980.

The best indicator for this phenomenon, of course, is the exchange rate. In expectation of the Fed's announcement, the euro shot to yet another record high on Wednesday afternoon, reaching $1.45032 for each euro before sliding back slightly on Thursday to $1.4425...

Originated by Businessweek
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This entry was posted by David Choi, on Thursday, November 1, 2007. You can leave your response.