Fed Cuts Interest Rate by 1/4 Point


The Federal Reserve cut its benchmark interest rate by a quarter point to 4.5 percent to cushion the U.S. economy from the housing recession that officials predict will extend into next year.

``Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets,'' the Federal Open Market Committee said in a statement after the meeting today in Washington. ``The committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.''

Policy makers lowered borrowing costs for a second month even after reports today showed the economy expanded more than forecast last quarter and companies stepped up hiring. Chairman Ben S. Bernanke emphasized this month that the outlook is ``uncertain'' and housing will constrain growth into 2008.

``Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance,'' the Fed said. ``However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.''

Today's decision wasn't unanimous. Kansas City Fed President Thomas Hoenig preferred no change.

Discount Rate

The Fed also lowered the discount rate, the cost of direct loans to banks, by 25 basis points to 5 percent, from 5.25 percent. A basis point is 0.01 percentage point.

Policy makers said in the statement that inflation ``risks remain'' and the committee ``will continue to monitor inflation developments carefully.''

Economists anticipated the decision, according to the median of 108 forecasts in a Bloomberg News survey. Futures contracts on the Chicago Board of Trade showed traders also expected a quarter-point move.

Policy makers have now lowered their target rate for overnight loans between banks by 0.75 percentage point in six weeks, the most aggressive easing since the economy was emerging from its last recession in 2001.

Consumer-price increases have slowed, while a falling dollar and rising oil costs threaten a renewed acceleration. The Fed's preferred gauge, the personal consumption expenditures price index excluding food and energy, probably rose 1.8 percent in September from a year ago, according to the median forecast. The Commerce Department reports the figures tomorrow.

The index remained below 2 percent from June to August. Bernanke, before taking the Fed's helm, said his ``comfort'' range for the measure was 1 percent to 2 percent.

The benchmark rate is now at the lowest level since January 2006. Bernanke took office the following month, and continued a series of rate increases that lifted the federal funds rate to 5.25 percent by June last year.

 


Bloomberg
10/31/2007 11:34:37 AM