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The Honolulu Advertiser
Posted on: Thursday, November 1, 2007

Fed cuts federal funds rate to 4.5%

By Neil Irwin
Washington Post

Hawaii news photo - The Honolulu Advertiser

Trader Anthony M. Mazur Jr. signals in the Standard & Poor's 500 futures pit at the Chicago Mercantile Exchange. After the Federal Reserve announced it was slashing the federal funds rate, S&P's 500 index gained 18 points to close at 1,549.

CHARLES REX ARBOGAST | Associated Press

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WASHINGTON — The Federal Reserve slashed a key interest rate yesterday, continuing its campaign to try to keep problems in the housing market from slowing the U.S. economy, even as a separate government report indicated that the economy grew at a healthy pace in the third quarter.

The central bank's policymaking body cut the federal funds rate, a rate at which banks lend to each other, a quarter percentage point to 4.5 percent — a move that had been widely anticipated by investors. At its previous meeting, on Sept. 18, it had cut rates half a percentage point.

The lower rates are likely to result in lower borrowing costs for holders of credit cards, adjustable rate mortgages and student and auto loans. It also will make it cheaper for businesses to expand by borrowing money.

Markets fell immediately after the announcement. The Dow Jones industrial average, which was up as much as 80 points before the Fed announcement, was gyrating wildly shortly afterward, fell briefly into negative territory and then quickly rose again. The Dow closed up more than 137 points, or 1 percent, at 13,930. The Standard & Poor's 500 index added 18 points to rise to 1,549. The Nasdaq grew by 1.5 percent, or 42 points, to 2,859.

"The pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction," said the Federal Open Market Committee in a statement accompanying its announcement. "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 and promote moderate growth over time."

The statement appeared to signal that the central bank would be reluctant to cut the rate further at future meetings, as it said that the risk of inflation now roughly balances the risk of slower growth. The FOMC next meets on Dec. 11.

The move came despite a Commerce Department report earlier yesterday that the economy grew faster than expected in the third quarter, with gross domestic product climbing at a 3.9 percent annual pace. For most of that period, the three months that ended Sept. 30, the impact of the late summer crisis in housing and credit markets had not had time to affect financial decisions.

The increase in GDP, a broad measure of the value of goods and services produced within U.S. borders, was driven by a sharp rise in exports (up 16.2 percent) and solid gains in consumer spending (up 3 percent). Those were enough to make up for a steep, 20.1 percent drop in investment in housing.

But for GDP, the big question ahead is whether American consumers will keep spending at a healthy pace even as the housing market gets worse.

Fed Chairman Ben Bernanke and other Fed officials have indicated in recent speeches that they believe the economy outside the housing sector is holding up reasonably well, with businesses still hiring and consumers still spending money. But problems in the housing market have continued, and major banks and other financial institutions are displaying an inability to account reliably for their losses from recent credit problems — an uncertainty that could lead them to curtail lending down the road.

But officials worry that those negative forces will weaken the economy in the coming year and say that the economic outlook is more uncertain than usual. That was why they cut the federal funds rate by half a percentage point at their last policymaking meeting and why the further reduction was expected yesterday.