Fed implies rate cut is sufficient, for now

WASHINGTON -- The Federal Reserve cut U.S. interest rates by a quarter-percentage point Wednesday to buffer the economy from a housing downturn, but suggested further rate reductions were far from a sure bet.

The decision by the central bank's Federal Open Market Committee to lower the overnight federal funds rate to 4.5 percent -- a move that followed a more aggressive half-point cut last month -- was widely expected.

But the Fed offered a bit of a surprise by saying the risk of inflation was about equal with downside risks to growth.

That statement, coupled with a dissent from Kansas City Federal Reserve Bank President Thomas Hoenig, who favored holding rates steady, threw cold water on expectations that additional reductions in borrowing costs are in store.

"The Fed has no inclination to cut rates further unless the economic data suggest otherwise. Hence, barring another financial shock, the economic data will have to weaken for Fed easing to come back on the table," said Joseph LaVorgna, chief U.S. economist for Deutsche Bank.

U.S. Treasury debt prices fell and stocks initially dropped as traders saw the Fed's statement suggesting a lower likelihood of further rate reductions.

Stock prices, however, later turned around and the blue- chip Dow Jones industrial average closed up 137.54 points, while the dollar hit a record low against the euro.

In announcing its decision, the U.S. central bank said its actions should put the economy on better footing and help it weather the housing slump and related credit market woes.

"The pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction," the Fed said. But it said its rate cuts "should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time."

The decision by the Fed to lower the federal funds rate, which governs overnight borrowing between banks, led major banks to lower the prime rate they charge on loans to their best customers. It could also lead to lower rates on credit cards and auto loans for consumers; most mortgage rates, however, are tied to long-term rates set by the markets.