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

2008-01-30 14:14 (New York)





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 as many weeks, 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 move, coupled with the Jan. 22 emergency cut of three-

quarters of a point, is the fastest easing of monetary policy

since 1990. Hours before the decision was announced, the

Commerce Department reported that gross domestic product grew

0.6 percent in the fourth quarter, half the pace forecast by

economists.

``Financial markets remain under considerable stress, and

credit has tightened further for some businesses and

households,'' the Fed said today. ``Recent information indicates

a deepening of the housing contraction as well as some softening

in labor markets.''

Fed officials said they will continue to assess financial

markets and the economy ``and will act in a timely manner as

needed.''

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.



Fisher Dissents



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.

``It is a very uncertain time for the outlook,'' Laurence

Meyer, a former Fed governor and vice chairman of Macroeconomic

Advisers LLC, said before the announcement. ``The good news is

that monetary policy makers have the flexibility to respond to

changing circumstances.''

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.

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.''

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.''



--With reporting by Michael McKee and Kathleen Hays in New York.

Editors: Chris Anstey, Daniel Moss