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Fed Cuts Key Rate by Half Point to 1%

Updated from 2:19 p.m. EDT

The Federal Reserve dropped its benchmark interest rate target by 50 basis points to 1% on Wednesday, a widely anticipated move intended to help free up the credit markets.

The Fed funds rate target is now 1%, the lowest level in more than four years. In announcing its decision, the Federal Open Market Committee cited a drop in spending by consumers and businesses, and predicted that consumption may slow further due to tighter lending standards.

"The pace of economic activity appears to have slowed markedly," the FOMC said in a statement, "owing importantly to a decline in consumer expenditures."

Consumer spending accounts for roughly two-thirds of the U.S. economy, and the spread of financial turmoil across the globe "is damping the prospects for U.S. exports" as well, the FOMC noted. All nine Fed governors joined Chairman Ben Bernanke to vote in favor of the rate cut. They also unanimously approved a 50-basis point cut in the discount rate to 1.25%. The Fed funds target affects lending among banks, while the discount rate is what banks pay in exchange for direct loans from the government.

The latest drop in rate targets comes after the central bank and several of its global peers, including the Bank of England and European Central Bank, enacted a 50-basis-point cut on Oct. 8. Since the Fed began a rate-cutting campaign, the funds rate target has dropped 425 basis points, from 5.25% in mid-September of 2007.

The futures market on Wednesday morning had been "priced fully" for a 50-basis point cut with "very low odds" on a 75 basis-point cut, according to Tony Crescenzi, chief bond market strategist at Miller Tabak + Co. Doug Roberts, chief investment strategist at Channel Capital Research, says that while some were predicting a smaller, 25-point cut, "50 basis points was the right number."
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