Fed lowers rate again

The Baltimore Sun

WASHINGTON - The Federal Reserve, mixing concern about the feeble economy with worries about rising inflation, reduced short-term interest rates yesterday for the seventh time since September, while signaling a pause in any additional rate cuts for now.

The Fed's action brought the federal funds rate - the rate it charges banks for overnight loans - to 2 percent, from 2.25 percent, the lowest level since November 2004. It defended that step as necessary to counter the ailing housing sector and the "considerable stress" shadowing financial markets.

The move followed new indications that the economy remained fragile at best. The Commerce Department reported early yesterday that the economy expanded only 0.6 percent on an annualized basis in the first three months of 2008, short of an overall downturn but far from healthy.

The new economic data and the Fed's move reflect what most Americans have been experiencing. They are spending more on gasoline and food and less on almost everything else. Their homes have declined in value, and businesses are investing less and shedding jobs.

The move came with a repetition of the discord that has accompanied some of the Fed's interest rate cuts in the past, each time provoking criticism among conservative economists and other commentators.

Two regional Fed bank presidents on the policy-setting committee again dissented from the decision to cut interest rates.

These officials and many other economists have called on the Fed to shift its focus from countering a possible recession to heading off inflation spurred by the high cost of food and energy.

The Fed's statement signaled that it was on the verge of doing just that but wanted to nudge rates lower one more time to show its concern about weakness and instability in the markets and the economy at large.

Enthusiastic Wall Street investors drove the Dow Jones industrial average up more than 178 points, lifting it above 13,000 for the first time since early January, right after the Fed action. Then traders' caution returned, and the index ended the day 11.81 points below where it started.

The Federal Open Market Committee - made up of Fed board members and presidents of regional Federal Reserve banks - employed careful language cues to suggest that it was done lowering rates, for now anyway.

"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity," the committee said, "should help to promote moderate growth over time and to mitigate risks to economic activity."

This was widely taken to mean that the actions since last summer - cutting the fed funds rate to 2 percent, from 5.25 percent, opening new lending facilities to banks, intervening in the fire sale of Bear Stearns Cos. and acting generally to make it easier for financial firms to buy and sell securities - was enough for now.

The fact that, in its statement yesterday, the Fed also omitted references to the "downside risks" to the economy and to its intention to respond to those risks "in a timely manner" - words used in March when rates were last cut - was also a sign of a pause in rate-cutting.

At the same time, the Fed appeared to leave itself enough room to act to spur the economy if the situation deteriorates.

"The Fed is leaving it up to financial markets to determine what they do next," said Michael T. Darda, chief economist at MKM Partners, a private equity and research firm. "I don't know if we call this a hint of a pause. It was more like a soft gesture."

Two anti-inflation hawks on the Open Market Committee - Richard W. Fisher, president of the Dallas Fed, and Charles I. Plosser, president of the Philadelphia Fed - voted against lowering the rates, as they had last month when the Fed cut rates to 2.25, from 3 percent.

But some economists skeptical about the need to spur the economy, and sharing the Fed dissenters' concerns about inflation, said that the latest Fed action would not have much of an impact.

"I think it will do little good in terms of economic expansion and the credit market's problems," said Martin Feldstein, professor of economics at Harvard and president of the National Bureau of Economic Research.

"I think it will exacerbate somewhat the commodity price boom," he added. "It would be better not to do it than do it. But if they feel they have to do it one more time and quit, that wouldn't be the end of the world."

The latest step by the Fed follows a period of aggressive rate cuts but also a time of mixed signals and what some say have been missteps.

Some critics of the Fed's policies of the past few years say it has been too quick to respond to momentary economic trends, and overly sensitive to fears of a recession.

Its policies of ever lower interest rates have contributed to the decline in the value of the dollar as investors have bought higher-yielding government securities in Europe and is seen by some as sowing the seeds of higher inflation in the future.

"My view is that the Fed is back doing the silly things it did in the 1970s, of trying to make judgments that have long-term consequences based on short-term data," said Allan H. Meltzer, professor of political economy at Carnegie Mellon University. "This is the most exaggerated economic downturn in my 50 years of watching Fed policy," Meltzer said.

The Associated Press contributed to this article.

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