Fed Cuts Rate to 1%


The Federal Reserve cut its benchmark interest rate by half a percentage point to 1 percent, matching a half-century low, in an effort to avert the worst U.S. economic downturn in the postwar era.

Central bankers worldwide are trying to revive credit and stop a self-reinforcing downturn in consumer spending and bank lending from triggering a global recession. Today's decision follows the half-point reduction the Fed coordinated with the European Central Bank and four other central banks on Oct. 8. Borrowing costs were pared today in Norway and China.

The U.S. economy shrank at a 0.5 percent annual rate last quarter, the most since the 2001 recession, the Commerce Department's report on gross domestic product will probably show tomorrow. Economists expect the slump to persist in the fourth quarter, according to the median estimate.

Plunging commodity prices, including a 54 decline in the cost of oil from a record in July, have eased inflation pressures.

The vote was unanimous. The Fed also lowered the discount rate a half point to 1.25 percent.

While cutting the main rate during the past 13 months from 5.25 percent, Fed Chairman Ben S. Bernanke, 54, has created six loan programs channeling at least $700 billion in cash and collateral into money markets as of Oct. 22.

Still, consumer confidence tumbled this month to a record low, and orders for durable goods, excluding automobiles and aircraft, dropped for a second straight month in September, reports showed this week. Home prices in 20 U.S. cities declined 16.6 percent in August from a year earlier as foreclosures climbed, according to the S&P/Case-Shiller home price index. The Standard & Poor's 500 Stock Index is down 36 percent this year.

The credit crisis that began in August 2007 with rising foreclosure rates has led to the collapse or forced mergers of some of Wall Street's biggest firms. Lehman Brothers Holdings Inc. filed for bankruptcy last month, while the government seized control of American International Group Inc. and put Fannie Mae and Freddie Mac under conservatorship. Wachovia Corp. agreed this month to be acquired by Wells Fargo & Co.

Global financial institutions have reported $680 billion in writedowns and credit losses on home loans, mortgage-backed securities and related assets.


TradingEconomics.com, Bloomberg.com
10/29/2008 12:06:46 PM