Fed cuts rates by quarter point

The Federal Reserve cut interest rates by a quarter-percentage point on 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.

U.S. interest-rate futures contracts implied only a 42 percent chance the Fed will lower rates again at its next meeting in December, down from 64 percent overnight.