January 31, 2008 in Business

Rate cut is another effort against recession

Jeannine Aversa Associated Press
 

WASHINGTON – The Federal Reserve delivered powerful relief to people and businesses squeezed by the ailing economy Wednesday, cutting interest rates ever deeper in an effort to avert or at least soften the blow of a recession.

Hours before the Fed’s action, the government reported the economy nearly stalled in the fourth quarter, with a growth rate of 0.6 percent, capping its worst year since 2002.

Wednesday’s Commerce Department report reflected worsening problems in the housing market and harder-to-get credit that made individuals and businesses more cautious in their spending. Fears of a recession have grown, even as inflation remained elevated.

The fallout has shaken Wall Street, catapulted the economy to Topic A among worried families and galvanized political figures, including those vying to be the next president.

“The economy is hanging by a thread,” said Stuart Hoffman, chief economist at PNC Financial Services Group.

For all of 2007, the economy grew by just 2.2 percent, the weakest performance in five years, when the country was struggling to recover from the 2001 recession. The housing collapse was the biggest culprit; builders slashed spending on housing projects by 16.9 percent on an annualized basis, the most in 25 years.

The bold, half-point reduction approved by Fed Chairman Ben Bernanke and all but one of his colleagues came as President Bush and Congress raced to enact a separate rescue package – including tax rebates for individuals and tax breaks for companies – to help energize an economy in danger of stalling.

Commercial banks followed the Fed action by lowering their prime lending rate by the same half-percentage point – to 6 percent, the lowest in nearly three years. That prime rate applies to certain credit cards, home equity lines of credit and other loans.

In its 9-1 decision, the Federal Reserve dropped its key rate to 3 percent at the end of a two-day meeting. It was the second Fed rate cut in just more than a week, and the policymakers signaled they were prepared to keep going lower if needed.

The cuts have helped to restore some confidence among skittish investors, but financial markets remain fragile.

In the gravest challenge to his leadership since becoming Fed chief nearly two years ago, Bernanke must help stem the fallout from both the housing bust and a credit crunch.

Wall Street critics and others have taken Bernanke to task for waiting until September of last year to embark on a rate-cutting campaign, accusing the Fed chief of being behind the curve in dealing with the economy’s problems.

Bernanke also must be mindful of not letting inflation get out of hand – a delicate and tricky maneuver.

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