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Fed Lowers Rate to 3% as U.S. Expansion Falters

January 30th, 2008 6:32 PM by Lehel Szucs


By Craig Torres

Jan. 30 (Bloomberg) -- The Federal Reserve lowered its benchmark interest rate by half a percentage point to 3 percent, the second cut in nine days, to prevent the U.S. economy from sinking into a recession.

``Today's policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity,'' the Federal Open Market Committee said in a statement after meeting today in Washington. ``However, downside risks to growth remain.''

The language signals the central bank is prepared to make additional reductions to prevent a credit squeeze from further weakening the economy. Hours before the decision was announced, the Commerce Department reported that gross domestic product grew at an annual pace of 0.6 percent in the fourth quarter.

``They're going full-bore trying to keep the economy from recession,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. ``There's nothing in reserve here.''

Stocks rallied, while the dollar fell and Treasury notes weakened. The cumulative reduction in rates since Jan. 22 is the fastest easing of monetary policy since 1990.

``The Fed has gotten religion and is going do what they need to do,'' said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina.

Readiness to Respond

Fed officials said they will continue to assess financial markets and the economy ``and will act in a timely manner as needed.''

``Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,'' the Fed said. ``Recent information indicates a deepening of the housing contraction as well as some softening in labor markets.''

Chairman Ben S. Bernanke and the Fed's Board of Governors also voted to cut the discount rate, the cost of direct loans from the central bank, to 3.5 percent from 4 percent.

Dallas Fed President Richard Fisher dissented from today's decision, preferring no change.

Policy makers presented revised three-year economic forecasts at this week's gathering. The Fed will release the projections along with minutes of the meeting on Feb. 20.

Today's Commerce Department figures showed the Fed's preferred inflation gauge rose at a 2.7 percent annualized rate last quarter. Fed officials in October forecast the personal consumption expenditures price index minus food and energy would rise 1.6 percent to 1.9 percent in 2010, offering a measure of their longer-term inflation objective.


``The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully,'' the Fed said in today's statement.

Wall Street firms including Morgan Stanley, Merrill Lynch & Co., Goldman Sachs Group Inc. and Citigroup Inc. are forecasting the first recession since 2001 this year. Still, executives at firms such as Dow Chemical Co. said they don't detect a downturn yet, while risks remain.

This year ``will be slower than 2007,'' Andrew Liveris, the chairman and chief executive officer of Dow Chemical, said yesterday. ``It is an inconvenience, not a catastrophe.''

United Parcel Service Inc., Caterpillar Inc. and General Electric Co. are relying on gains overseas to counter slower growth at home.

Fed policy makers have struggled since August to contain the economic damage sparked by the worst housing recession in a quarter-century. The world's largest banks and securities firms have recorded more than $133 billion in asset writedowns and credit losses since the beginning of 2007, which analysts blamed on weak and fragmented supervision and poor credit analysis.

Housing Downturn

Foreclosure rates rose 75 percent in 2007 as a record amount of adjustable-rate loans to borrowers with weak or limited credit histories reset to higher rates, RealtyTrac Inc. data show. Home prices in 20 U.S. metropolitan areas fell 7.7 percent in November from a year earlier, the 11th consecutive decline, the S&P/Case-Shiller home-price index showed yesterday.

``We are in a historic housing bust right now, comparable to that of the Great Depression,'' said Robert Shiller, chief economist of MacroMarkets LLC in Madison, New Jersey, who co- founded the house-price index. ``The unraveling of that has unpredictable consequences.''

Delay in 2007

Fed officials waited until September to cut the benchmark lending rate, even though premiums on corporate bonds and lower- rated securities began to climb in late June.

By December, Fed policy makers had cut the benchmark lending rate 1 percentage point, yet still described the policy rate as ``somewhat restrictive'' as they deliberated whether to cut again that month, minutes show.

The government's December payroll report, which showed a loss of 13,000 private sector jobs, the first decline since July 2003, began to reshape Fed officials' views about risks.

Bernanke used a Jan. 10 speech to update the public. ``The baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced,'' he said, breaking with the Fed's statement a month earlier which only expressed ``uncertainty'' about the outlook. He pledged ``substantive additional action as needed.''

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Last Updated: January 30, 2008 14:52 EST

Posted in:General
Posted by Lehel Szucs on January 30th, 2008 6:32 PM



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