Fed cuts rate to help ease housing slump
Updated: 2007-11-01 06:40
Washington - The US 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.
 Trader Anthony M. Mazur Jr. signals in the Standard & Poor's 500 futures pit at the Chicago Mercantile Exchange on Wednesday, Oct. 31, 2007.[Agencies] |
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.
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