Fed cuts interest rates by only a quarter-point

WASHINGTON (Agencies): The Federal Reserve on Wednesday cut U.S. interest rates a modest quarter-percentage point, restraining the pace of its aggressive rate-cutting campaign while signaling it remained ready to do more if needed.

The Federal Open Market Committee (FOMC) lowered its target for the federal funds rate by 25 basis points to 3.75 percent, and made a 25 basis point reduction in the largely symbolic discount rate to 3.25 percent.

The central bank, concluding a two-day meeting here, said the risks facing the U.S. economy remain tilted toward weakness.

"Although continuing favorable trends bolster long-term prospects for productivity growth and the economy, the Committee continues to believe that ... the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," the Fed statement said.

The move marked the sixth reduction in the federal funds rate since the beginning of the year, for a total of 275 basis points, or 2.75 percentage points.

By making credit available more cheaply, the Fed move seeks to revive a U.S. economy that expanded at a sluggish 1.3 percent rate in the first quarter, with little evidence of improvement in the current quarter.

But the Wednesday rate cut was the first time central bankers had eschewed an aggressive half percentage point move. The more modest move was seen by economists as possibly signaling the rate campaign may be nearing an end.

And paradoxically, by moving more modestly, the Fed's monetary medicine may actually have more effect, soothing inflation concerns and boosting confidence the economy is on the mend.

"It's interesting that they slowed the pace down. That tells you the Fed is growing confident that a rebound will be coming toward the end of the year, and that they have to start worrying about overdoing it," said Josh Stiles, senior bond strategist at IDEAglobal.com in New York.

Some observers were hoping for a half-point cut to match the five earlier reductions in rates, but others maintained that such a move could rekindle inflation as well as send a signal that the economy is in bad shape.

Merrill Lynch chief economist Bruce Steinberg said the Fed appeared to be unsure of how quickly the economy is recovering.

"We had hoped for a bigger 50 basis-point move, because the economy remains very weak and could've used the boost," Steinberg said.

Morgan Stanley senior equities trader Michael Lyons said the move was "a big disappointment" to investors but suggested that Fed officials chose the smaller rate cut "because they didn't want to send a message that they think the economy is in very bad shape."

Past Fed rate-cutting campaigns have usually been accompanied by rising stock prices and falling bond yields -- helping the Fed to reignite growth. This time around, financial markets have been lent less of a helping hand to the Fed.