Fed Cuts Key Interest Rate Again Amid Growing Signs of Recession

Jan 31, 07:44 AM

WASHINGTON

Expect those interest rates on your home-equity loans and some credit cards to go down another half of a percentage point.

Worried that the U.S. economy may be sinking into recession, the Federal Reserve on Wednesday placed one more prop under it by making its second rate reduction in just eight days. Since September, the nation's central bank has slashed rates five times, taking the benchmark federal funds rate from 5.25 percent to just 3 percent.

The rate, which banks use when they lend to each other, serves as a peg for setting other interest rates. So after Wednesday's Fed action, major banks announced they are cutting their prime-rate loans by half a point, to 6 percent, the lowest level since the spring of 2005.

Banks charge their best business customers the prime rate and also use it to set interest rates for consumer loans - credit cards, car loans, home-equity loans and more.

The Fed's policymakers indicated they are still worried about housing and jobs, and would keep cutting borrowing costs if that would help.

"Credit has tightened further for some businesses and households," the Fed said in a statement. "Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets."

The thinking is that cheaper loans should help stimulate the economy, especially since rates have been dropping so quickly. On Jan. 22, the Fed announced a cut of three-quarters of a point after a rare unscheduled meeting.

President Bush, visiting a helicopter company in Los Angeles on Wednesday, said he is confident about the economy's long-term outlook, but for now, "we've got some short-term issues to deal with." He said one reason for optimism is that "interest rates are low."

The latest rate cut capped a two-day meeting of the Fed and came hours after the release of a gloomy report from the Commerce Department. It said that in the final three months of 2007, the gross domestic product grew at an annual pace of just 0.6 percent.

That was a plunge from the third-quarter's annualized growth pace of 4.9 percent. Most economists had expected fourth-quarter growth would come in between 1 and 1.5 percent.

A recession officially is defined as two straight quarters of a shrinking GDP. Future revisions may show that growth was negative in the October-December period, marking the start of a recession if this quarter is as bad.

The Fed policymakers voted 9-1 in favor of spurring the economy with lower rates. Only Dallas Fed President Richard Fisher dissented, saying he preferred no rate change.

Economists who oppose more rate cuts think the Fed may have done enough stimulating already. They want the economy to cool a bit to beat back inflation, which has been rising along with oil prices.

Also, some point to the experience of a few years ago when then- Fed Chairman Alan Greenspan had slashed rates to 1 percent, a 45- year low, by the summer of 2003. Greenspan's Fed held rates there for a year before it began pushing them back up.

Critics contend those low rates helped feed a housing frenzy, in which home values zoomed and investors gobbled up risky loans, known as subprime mortgages, that had been made to borrowers with poor credit histories. When the housing market collapsed, the greatest damage was in subprime loans. Banks and other financial institutions have taken big hits on these soured mortgage investments.

Brian Bethune, an economist at Global Insight Inc., said in a written analysis that the Fed's campaign to drive down borrowing costs will help the economy until Congress' fiscal stimulus plan can kick in.

On Capitol Hill on Wednesday, the Senate Finance Committee approved its version of an economic stimulus package by a 14-7 vote. The Senate version differs from the $150 billion House bipartisan measure on several points. For example, it would provide tax rebate checks to more higher-income people and senior citizens on Social Security, and it would expand unemployment benefits. Still, lawmakers are expected to work out differences to complete the package before the Presidents' Day break begins Feb. 15.

Bush said that "whatever the Senate does, they should not delay this package."

If the legislation is moved along at that pace and signed by the president, rebate checks could go out to taxpayers sometime in the spring. To boost a sagging economy until then, Bethune said, the Fed likely will lower rates by another quarter percentage point at the next policy meeting March 18, and then a quarter point again on April 30.

"That will take the federal funds rate down to 2.5 percent, which should hold severe recessionary forces at bay until the fiscal stimulus 'jump-starts' growth in the second half of the year," he said.

This story was compiled from reports by Cox Newspapers and The Associated Press.

why the cuts

The Fed's policymakers said they are still worried about housing and jobs. The thinking is that cheaper loans should help stimulate the economy. local jobs

The jobless rate for Hampton Roads climbed in December.

Business, Page 2 criticism

Economists who oppose more rate cuts think the Fed may have done enough stimulating. They want the economy to cool a bit to beat back inflation, which has been rising along with oil prices.

Also, some point warily to when then-Fed Chairman Alan Greenspan slashed rates to 1 percent by the summer of 2003. They say those low rates fed a housing frenzy that, ultimately, went bust with the collapse of the subprime mortgage market.

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