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The Honolulu Advertiser
Posted on: Thursday, October 30, 2008

As expected, Fed slashes key rate 0.5%

By MARTIN CRUTSINGER
Associated Press

Hawaii news photo - The Honolulu Advertiser
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WASHINGTON — The Federal Reserve slashed a key interest rate by half a percentage point yesterday, driving it to a level seen only once before in the past half-century, and the government finally began distributing funds from the billions in the financial rescue package.

Those efforts and others were part of a concerted drive by officials, just days before a national election, to demonstrate they are moving as quickly as possible to deal with the most serious financial crisis to hit the country since the 1930s.

"Policymakers have their foot to the accelerator, and they are using every effort at their disposal to stop the slide in the economy and financial markets," said Mark Zandi, chief economist with Moody's www.Economy.com. "And it's not a moment too soon, given the serious damage that has already been done."

Wall Street, which the previous day posted the second-biggest point gain in history, was less impressed with yesterday's activity. The Dow Jones industrial average finished the day down 74 points, a drop analysts said partly reflected growing worries about whether the government's actions will be sufficient to avert a deep and prolonged recession.

Most of Hawai'i's larger banks all followed the Fed's lead, announcing cuts in their prime rates to 4 percent from 4.5 percent. The cuts by First Hawaiian Bank, Bank of Hawaii, American Savings Bank and Central Pacific Bank are effective today.

The Fed, as investors had hoped, announced a half-point cut in the federal funds rate, the interest that banks charge each other on overnight loans, driving it down to 1 percent, a low last seen in 2003-2004. That rate has not been lower since 1958 when Dwight D. Eisenhower was president.

Reducing the rate as low as zero cannot be ruled out, some analysts said, but they cautioned that reducing rates that far carried some risks, including that if the credit crisis suddenly worsened, the Fed would have used up its ammunition.

Analysts also noted that just lowering rates cannot serve as a panacea to overcome a credit crisis. While the goal is to encourage banks to begin lending again, financial institutions are skittish about extending new loans given the huge losses they have racked up in bad mortgages.

Meanwhile, the administration announced that the spigot had been opened on the $700 billion fund created by Congress Oct. 3 to rescue the U.S. financial system. Treasury issued a report showing checks had been disbursed for $125 billion in payments to nine major banks, including Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs and Morgan Stanley. The goal is to bolster their balance sheets so they will resume more normal lending.

And the administration was nearing an agreement on a plan to help around 3 million homeowners avoid foreclosure, according to sources who had been briefed on the matter. The program would be the most aggressive effort yet to limit damages from the severe housing slump.

Besides cutting interest rates, the Fed announced it was extending credit lines worth $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore in an effort to bolster financial markets in those countries and relieve investors' anxieties.