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. Last Updated: 07/27/2016

Fed Trims Interest Rates to 45-Year Low

WASHINGTON -- The Federal Reserve has trimmed U.S. interest rates a quarter percentage point to 45-year lows, citing recent hopeful economic signs as it offered a weaker economic tonic than markets had hoped.

Repeating its concern about risks of a further fall in inflation, the policy-making Federal Open Market Committee voted 11-1 on Wednesday to lower its bellwether federal funds rate for overnight loans between banks to 1 percent.

One policymaker -- San Francisco Fed bank President Robert Parry -- dissented in favor of a heftier half percentage point cut. Wall Street analysts were split ahead of the decision on the likely size of the expected reduction, and bond prices fell on the news that the Fed had opted for a smaller cut.

Economists said policy-makers had at least two reasons for a smaller reduction -- a brightening outlook for second-half growth and a dwindling stock of rate-cutting power.

"Recent signs point to a firming in spending, markedly improved financial conditions and labor and product markets that are stabilizing," the FOMC said in a statement. "The economy, nonetheless, has yet to exhibit sustainable growth."

Stock markets have been rallying recently, although they fell in the wake of the Fed decision, and corporate borrowing conditions are becoming easier.

The extra dose of stimulus from lower borrowing costs should support economic improvement "over time," the Fed said.

Economist Anthony Chan of Banc One Investment Advisors in Columbus, Ohio, said policymakers were preserving firepower in case their cautious optimism is not borne out soon by concrete evidence of an economic rebound and more stimulus is needed.

"There is little doubt that when an individual is besieged by many attackers while holding limited ammunition, each shot is used sparingly to ensure that all those remaining realize the surrounded person has the ability to get the job done," Chan said.

As in its statement following its meeting May 6, the Fed was sanguine about prospects for future growth even as it voiced worry about the risk of deflation or falling prices.

"On balance, the committee believes that the latter concern is likely to predominate for the foreseeable future."

Recent data have shown the economy is still crawling back from a relatively mild recession in 2001, a sluggish pace that has pushed the unemployment rate to above 6 percent from under 4 percent late in 2000.

Gross domestic product has expanded at around a 2 percent annual rate, well under the 3 percent to 3.5 percent pace seen as the U.S. economy's long-term potential for growth.

The single bright spot -- largely stemming from low interest rates -- has been housing. Other key sectors like manufacturing have been in the doldrums.

Fresh economic data Wednesday confirmed these trends.

The U.S. Commerce Department said sales of new single-family homes jumped 12.5 percent last month to a record annual clip of 1.157 million units. Meanwhile, the private National Association of Realtors said sales of previously owned homes rose 1.2 percent in May to 5.92 million units.

On the other side of the ledger, orders for costly durable goods unexpectedly sank for a second straight month, falling 0.3 percent in May after a 2.4 percent plunge in April.

Most forecasts call for a solid pickup in U.S. economic activity in the second half, which begins next week. The Bond Market Association said this week it expected growth to hit a 3.5 percent annual rate in the final six months of the year, well ahead of soft first-half growth.