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Fed Cuts Rates to 4.5 Percent

By Martin Crutsinger,

Posted: 2007-11-01 06:29:41

WASHINGTON (Oct. 31) - The Federal Reserve sliced an important interest rate Wednesday - its second reduction in the last six weeks - to help the economy survive the strains of a deepening housing slump that is likely to crimp growth in the coming months.

Fed Chairman Ben Bernanke and all but one of his colleagues agreed to lower the federal funds rate by one-quarter percentage point to 4.50 percent at the end of a two-day meeting on Wednesday.

"The pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction," the Fed acknowledged in a statement, explaining its action.

The funds rate affects many other interest rates charged to individuals and businesses and is the Fed's most potent tool for influencing economic activity.

In response, commercial banks, including Bank of America , Wells Fargo and KeyCorp ., announced that they were cutting their prime lending rate - for certain credit cards, home equity lines of credit and other loans - by a corresponding amount, to 7.50 percent.

The rationale behind the cuts is that the lower borrowing costs will induce consumers and businesses to boost spending, energizing economic growth.

Wall Street was cheered by the Fed action, propelling the Dow Jones industrial up by more than 100 points.

The Fed policymakers supporting Wednesday's rate cut said the action - along with a rate reduction in September was needed to "forestall some of the adverse effects on the broader economy" that might arise from the housing and credit troubles that have wreaked havoc on Wall Street over the past few months.

Fed policymakers indicated that the two rate cuts ordered so far may be sufficient to help the economy safely make its way through the trouble spots.

The Fed said the risks to the economy from inflation "roughly balance," or are equal to, the risks of a serious downturn in economic growth. Previously, the risks of a recession were seen as more of a threat to the country's economic health.

"The message: They are now done for the time being," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group. "They have taken out a significant insurance policy and now they believe they are fully covered against a recession risk - at least for the near term," she said.

The 9-1 decision to cut rates on Wednesday was opposed by Thomas Hoenig, president of the Federal Reserve Bank of Kansas City. He preferred no change in the funds rate.

So far, the economy has shown amazing resilience to the housing and credit strains.

The economy grew at a brisk 3.9 percent pace in the summer, the fastest in 1 1/2 years, the government reported Wednesday. The impressive performance came even as the housing market sank deeper into the doldrums.

Fed policymakers, in their statement, said economy turned in a "solid" performance in the third quarter. They also said that "strains from financial markets have eased somewhat on balance."

Even so, economic growth is expected to slow to a pace of around 2 percent or less in the current October-to-December period as the toll of the deteriorating housing market catches up with consumers and chills their spending.

As another bolstering move, the Fed also sliced its lending rate to banks by one-quarter percentage point. That was the third cut to that rate since mid August.

Complicating the Fed's job to keep the economy and inflation on an even keel is surging oil prices. They soared to a record near $95 a barrel on Wednesday.

The Fed said that "recent increases in energy and commodity prices, among other factors, have put renewed upward pressure on inflation." The Fed said that while some inflation barometers that exclude energy and food prices have improved modestly this year, some inflation risks remain. They pledged to "monitor inflation developments carefully."

If rising oil prices boost the prices of many other goods and services in the economy, then inflation could take off. At the same time, high energy prices could crimp consumer and business spending, putting another damper on overall economic activity.

Although the economy performed well in the third quarter, the housing slump deepened. It shaved more than a full percentage point off economic growth.

The meltdown in the mortgage market has made it harder for people to obtain financing to buy homes. That's aggravating problems in the housing market and leading to a mounting pileup of unsold homes. The housing slump is expected to drag on well into next year and foreclosures are expected to rise.

The Fed in September lowered its key interest rate for the first time in more than four years. It was seen as a pre-emptive strike to ensure housing and credit problems don't sink the economy. The Fed's aggressive action at that time prompted a rally on Wall Street, propelling the Dow Jones industrials up by nearly 336 points. It was the Dow's biggest one-day point jump in nearly five years.

Copyright 2008 The Associated Press. The information contained in the AP news report may not be published, broadcast, rewritten or otherwise distributed without the prior written authority of The Associated Press. All active hyperlinks have been inserted by AOL.

2007-10-31 06:39:15

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295 comments

bllttlk 12:46:48 PM Nov 01 2007

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mrst2328--I agree with you completely. They have to do something to help boost the holiday shopping season. With high gas prices and a hefty mortgage, no one can afford to shop with cash. People will use their credit cards to pay for the holiday. Then after the new year the rates will rise and here they are stuck once again with mounting credit card debt.

mrst2328 08:47:26 AM Nov 01 2007

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BEWARE. THEY BANKS ARE COUNTING ON CREDIT CARDS NOW THE HOLIDAYS ARE HERE. AFTER THEY END, RATES WILL RISE AGAIN!

cshae89546 08:07:26 AM Nov 01 2007

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kmbw106 wrote;

"It was huge mistake to lower the interest rates. Basically, the government is rewarding bad and greedy behavior."

Reality check. The government usually does cater to greedy behavior. This is nothing new!

kmbw106 07:57:00 AM Nov 01 2007

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It was huge mistake to lower the interest rates. Basically, the government is rewarding bad and greedy behavior. It sends the message that if you are greedy and not responsible, Big Brother will be there to clean up the mess. It's another example of the dumbing down of America. Everyone, including the folks who borrowed but 'didn't know' their mortgages would go up, need to take responsibility for their decisions and their actions. People need to stop acting like victims. It's disgusting.

fairlane1 07:52:00 AM Nov 01 2007

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Aftonmoon.....agreed with you completely. Hard working middle and lower class...that were smart are being screwed. Nobody has savings...at 0.20%...why would anyone put money in a savings account. There are more banks in my area than you can count....cause they are the ones making the money and now we start bailing them out!! If China and Japan called in their loans this country would be dead broke! Whoever gets in as President, has the moral obligation to tell the country exactly where we stand financially and it ain't pretty!

fopdaddy1 07:02:26 AM Nov 01 2007

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rate cuts hurt the vast majority of americans by tanking the dollar

Aftonmoon 07:01:04 AM Nov 01 2007

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This is just why the Federal Reserve Bank should be abolished: it is a political, not an economic institution. A recession will hurt The Republicans so the rate is lowered, when in fact it should be raised. People who borrowed money that they could not pay back, for homes that they could not afford, the builders who produced the homes for these fools, and the banks and mortgage companies that convinced the idiots that there really is a free lunch ,should not be bailed out. The homes should be forclosed and the loan companies and banks that made the loans should suffer the losses.

The capitalist system is the best system because it is self correcting. By interfering in markets The Fed only punishes the prudent and rewards the con men and speculators. This can only go on so long. Eventually the dollar will collapse. An economy cannot be fueled by debt; it must be fueled by high paying jobs.

If tomorrow the dollar ceased to be accepted as the reserve currency the entire US econlmy wou

imavege 06:40:08 AM Nov 01 2007

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Last month the Fed droppec the rate 1/2 point. Did anyone see the mortgage rates drop? Just gives more margins to the lenders who created this mess.

pthfndr3814 06:31:00 AM Nov 01 2007

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Ron Paul is a goofy little troll - much like Kucinich. They both see "UFOs" spinning around as they toke on the hand rolled smokes..Pay no mind to anyone who's voice goes up so many octaves and he starts whining when trying to make a point. He's a quack turned politician and a pathetic little loser who only appeals to goofy zealots.

elsganz 06:16:22 AM Nov 01 2007

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biodrone07

Ron Paul also supports getting rid of CFR, I.R.S. , and the criminal C.I.A.
WBNK, CFR, U.N. G8, W.H.O. CDC.
= = = =
I read Ron Paul proposal to illiminate IRS however it won't really happen because you need both a unaimous vote from Democrats/Republicans to achieve that and they will fight to keep corruption alive.

By the way in Cheyenne WY I DID NOT SEE THE DEBATE TELEVISED unless I missed it.
Excellent post !

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295 comments