Fed

By Eoin Callan in Washington and Michael Mackenzie in New York

Published: October 31 2007 18:16 | Last updated: November 1 2007 01:01

The US Federal Reserve cut interest rates by a quarter of a point to 4.5 per cent on Wednesday, but warned investors against banking on further monetary easing, sending short-term government bond yields soaring.

The central bankЎЇs Federal Open Market Committee signalled that it was shifting to a neutral stance on future rate cuts, saying ÐŽothe upside risks to inflation roughly balance the downside risks to growthÐŽ±.

However, one Fed governor, Thomas Hoenig of Missouri, dissented, preferring to leave rates unchanged in another signal the Fed may be more hawkish than markets might have hoped.

ÐŽoThis should not be read as the Fed closing the door on easing, but they are signalling the bar will be set quite high for them to cut at the next meeting,ÐŽ± said strategist Alan Ruskin at RBS Greenwich Capital.

The yield on the two-year note rose 12 basis points to a high of 3.92 per cent. Interest rate futures reflected lower odds of further rate cuts when the FOMC meets in December or early next year.

The Fed is ÐŽotelling you theyЎЇre on hold probably through DecemberÐŽ±, said Charles Comiskey, head of Treasury trading at HSBC. But investors continued to price in a high probability of a cut in rates to 4.25 per cent after the January FOMC meeting.

The dollar fell to a new record low of $1.4504 against the euro. The broad equity benchmarks briefly erased gains and fell into negative territory, but later rallied. By the close of trading, the S&P 500 had risen 1.2 per cent from its low for the day.

The Fed said in its statement accompanying the decision that ÐŽothe pace of economic expansion