Fed Cuts Interest Rate by Quarter Point

WASHINGTON (AP) - The Federal Reserve, confronted with surging oil prices and a slumping housing market, cut a key interest rate by a quarter-point on Wednesday, but signaled that may be all the rate relief the economy needs right now.

The central bank lowered the federal funds rate to 4.5 percent, as had been expected. But while financial markets had hoped for a clear signal that further rate cuts could be forthcoming, the central bank instead signaled that the September and October rate cuts may be it.

While economists are worried that growth will slow dramatically in the current quarter under the impact of a deepening housing slump, a severe credit crisis and record-high oil prices, the Fed sounded a more upbeat tone.

The central bank also expressed continued worries about inflation and said it believed after the two rate cuts, the risks between week growth and higher inflation were roughly balanced.

(AP) In a file photo one of the Federal Reserve buildings is seen Friday, Aug. 17, 2007, in Washington. …
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“The odds of another rate cut at the December meeting are substantially less than they were before this statement,” said David Jones, chief economist at DMJ Advisors in Denver. Jones said he still expected one more rate cut to deal with a weak economy but that it will most likely come at the Fed’s January meeting.

Wall Street sagged a bit immediately after the announcement, but then quickly regained its footing and was up more than 120 points in late afternoon trading.

In a brief statement explaining the decision, Federal Reserve Chairman Ben Bernanke and his colleagues said that the central bank now judges that “the upside risks to inflation roughly balance the downside risks to growth.”

By stating that risks are now roughly balanced, the Fed was seen as signaling that it judges that further rate cuts may not be necessary.

The Fed’s decision came on a 9-1 vote with Thomas Hoenig, president of the Kansas City regional Fed bank dissenting, arguing that he preferred no change in the funds rate. The Fed had lowered the funds rate by a bolder half-point at its Sept. 18 meeting.

Commenting on the economy, the Fed struck a more positive tone than it did last month when it expressed concerns about the toll the August credit crisis would take on housing and the overall economy.

In the current statement, the Fed said, “Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance.”

The central bank said the pace of the economic expansion “will likely slow in the near term, partly reflecting the intensification of the housing correction.”

The Fed met on the same day the government announced that the overall economy grew at a stronger-than-expected 3.9 percent rate in the July-September quarter. Many economists believe growth will dip to around 2 percent in the current quarter and may slow even further to around 1 percent in the first three months of next year.

On inflation, the central bank said the reading on core inflation, which excludes energy and food, had “improved modestly this year” but expressed worries about what the recent increases in energy prices and other commodities might do to inflation pressures going forward.

The committee said that “some inflation risks remain,” a signal that it will be hesitant to cut rates further because of concerns on inflation.

The Fed had pushed the federal funds rate up a record 17 consecutive times in quarter-point moves over two years. The last increase occurred in June 2006. From that time until last month, the rate was left unchanged as the central bank watched to see whether its credit tightening had the desired effect of slowing the economy enough to lessen inflation pressures.

However, the Fed’s goal of a soft-landing in which growth slows and inflation is contained has been threatened by the most severe housing downturn in more than two decades. Economists are worried that the credit crisis this summer will make home sales and prices fall even further, threatening consumer confidence and causing consumers to cut back on their spending.

Bernanke, who took over as Fed chairman in February 2006 from Alan Greenspan, came under criticism in August when the Fed left rates unchanged and declared that inflation was still the primary threat facing the economy.

But two days after that meeting when a severe credit crunch hit financial markets around the globe, the Fed went into action, providing billions of dollars in cash to the U.S. financial system, slashing the rate at which it makes direct loans to banks and then on Sept. 18 cutting the funds rate by a bigger-than-expected half point.

Lyle Gramley, a former Fed board member and now an economist with Stanford Financial Group, put the chances of a recession at around 40 percent, saying the Fed’s primary concern right now is what is happening in housing and how much of a spillover that will have on the overall economy.

“It is possible that the housing industry will take us over the edge into a recession,” he said, noting that every housing downturn of the past 60 years with the exception of two have triggered recessions.

AP | Martin Crutsinger | Wednesday, October 31, 2007