INSTANT VIEW: Fed cuts fed funds rate 0.25 pct to 4.25 pct

NEW YORK (Reuters) - The Federal Reserve cut its federal funds rate target for overnight interbank lending by 0.25 percentage points to 4.25 percent.

While the action was widely expected, some economists had thought the Fed might offer a larger 0.5 percentage points to help the U.S. economy withstand tightened credit and a prolong housing market slump.

In a related move, the Fed cut its discount rate for direct loans to banks by a matching 0.25 percent to 4.75 percent.

The Fed has now cut overnight rates by 1.0 percentage point since mid-September.

COMMENTS:

JOHN LONSKI, CHIEF ECONOMIST, MOODY'S INVESTORS SERVICE, NEW YORK, NEW YORK:

"I think there's going to be some disappointment that the cut was only 25 basis points given the fact that we did have a widening of credit risk premia and a widening of the spread between Libor and T-bills leading up to this meeting."

"By cutting by only 25 basis points, the Fed effectively conveys its sense that recession risks are not as great as what market participants believe. In other words, the Fed sees recession risk as being less than 40 percent whereas the market sees recession risk as at least 40 percent."

"Again, the shallowness of the rate cut is somewhat surprising given that the economic outlook has worsened since October 31 and there has been a noteworthy widening of spreads since the 31st of October. All of this is to suggest that the Fed is fairly confident that what lays ahead for the U.S. economy is nothing worse that a rough patch."

ASHRAF LAIDI, CHIEF MARKET ANALYST, CMC MARKETS, NEW YORK

"The Fed cut the fed funds rate by only 25 basis points and opted for a smaller-than-expected, 25-basis-point cut on the discount rate. That explains the rise of the dollar against all the currencies except the yen. The yen gains are a reflection of a resurgent reduction in risk appetite and a falling stock market. For now, this is a relatively good decision for the dollar, as risk reduction is forcing an unwind of short dollar positions and should boost the dollar over the next four weeks or so. However, the Fed's statement does suggest they could cut rates again, at which point things could change for the dollar."

MILTON EZRATI, SENIOR ECONOMIST, LORD ABBETT, JERSEY CITY, NEW JERSEY:

"We expected 25 basis points, it was the consensus in the marketplace. The Fed would been hard pressed to cut more given that they have done 50 and then 25. If they had cut more it would have frightened markets (saying) that they knew more than they were letting on. They couched this cut in economic terms but the Fed is really reacting to the financial situation. They realize the financial situation could have economic effects. They are not looking at the economic data as much as they normally do."

BILL HAMPEL, CHIEF ECONOMIST, CREDIT UNION NATIONAL ASSOCIATION, WASHINGTON D.C.:

"They emphasized that some inflation risks remain but in the next paragraph they have moved to a statement of more concern about the prospective growth of the economy. They are saying that they will be right on top of both the financial market situation and the economy, following it very closely, which means that it won't take much for them to continue to lower interest rates. In this statement they have put us all on notice not to be surprised to see rate cuts over the next several meetings. That's telling the bond market that the Fed will be putting downward pressure on interest rates."

KEN LANDON, GLOBAL FX STRATEGIST, JP MORGAN CHASE, NEW YORK: