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Fed cuts key interest rate by half-point

The Baltimore Sun

WASHINGTON - The Federal Reserve made a half-point cut to the benchmark lending rate yesterday afternoon in an attempt to bolster a slowing economy, leaving the door open for further cuts that could bring interest rates to historic lows.

In a statement, the rate-setting Federal Open Market Committee lowered the federal funds rate, for overnight lending between banks, to 1 percent. In a tandem move, commercial banks will lower the prime rate by a half-point to 4 percent. The rate is the one they charge their best customers.

The last time the Fed funds rate was this low was a period from June 2003 to June 2004, and the low cost of borrowing money then created the housing bubble that led to today's collapse in housing prices.

The deep rate cut was expected, in part because all evidence suggests that the U.S. economy is recession. Confirmation could come as early as today, when the Commerce Department releases what are sure to be dismal third-quarter growth numbers that are expected to show an economic contraction.

The Fed statement avoided using the word "recession," but it might as well have.

"The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports," the Fed said.

"Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

Leaving the door open for even more cuts later in the year, the Fed said it "will act as needed to promote sustainable economic growth and price stability."

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