Fed Lowers Funds Rate by Quarter Point

The Federal Reserve Board lowered the cost of borrowing Wednesday with a quarter-point drop in rates in hopes of energizing an economy troubled by a sagging housing market and soaring oil prices.

The new federal funds rate of 4.5 percent makes it cheaper for consumers and businesses to borrow money.

It is the second reduction this year in the federal funds rate — charged on overnight loans between banks — and was widely expected.

In September, the Fed slashed the federal funds rate by a half-percentage point to 4.75 percent in hopes of boosting the ailing housing market and buoying the overall economy.

The move comes as oil prices near $100 a barrel. That's viewed as a deterrent to consumer spending, which drives two-thirds of the economy. With oil at a record high, consumers will have to shell out more for gasoline, home-heating fuels and other products.

Fed Chairman Ben Bernanke and his colleagues on the board made the decision to cut the rate after a two-day meeting and in spite of a report Wednesday indicating that the overall economy has some resilience. The gross domestic product rose 3.9 percent during the July-September quarter.

On Sept. 18, the federal funds rate was slashed by a half-percentage point to 4.75 percent; and the Fed also cut its discount rate — charged on direct loans to banks — by the same amount to 5.25 percent. Many economists anticipated the Fed would follow September's half-point cut in the federal funds rate with a quarter-point cut.

"The economy is weakening and financial markets remain unsettled," said Mark Zandi, chief economist at Moody's Economy.com.

On Wednesday, the Fed suggested that it is done lowering rates for the time being. A brief statement explaining its action said the Fed now — after this second rate cut — judges that "the upside risks to inflation roughly balance the downside risks to growth."

Whether that comes to fruition remains to be seen. The economy's problems are mounting.

Its troubles include the worst housing slump in more than a dozen years as well as credit crises that have rattled financial markets here and abroad, causing some financial institutions to close, dramatically cut staff and oust top managers.

Further, mounting losses from defaults on subprime mortgages took a toll on consumers and businesses alike. On Tuesday, Merrill Lynch, one of the nation's largest financial brokerage firms, ousted its CEO Stan O'Neal after the firm had to write off $8 billion related to investments in subprime debt.

Subprime mortgage loans are issued to those with poor credit. Those consumers became ensnared in a web of debt because most of them were given adjustable-rate loans to mortgage homes that were too costly for them. Once the loans began to adjust upward after an initial, usually low, period, the payments became too much for those consumers to afford. So, they defaulted — sticking lenders with the cost.

Now, with lenders tightening mortgage standards, it's harder for prospective buyers to qualify for loans.

Meanwhile, the slump deepens: Sales of existing homes tumbled a record 8 percent in September, marking the largest decline since 1999, according to the National Association of Realtors. And even though new home sales registered an unexpected gain of 4.8 percent in September, the Commerce Department said the improvement comes after sales had fallen to the slowest pace in more than a decade.

The newest worry is the latest surge in oil prices as crude has touched a record $94 per barrel.

The worry is that the combination of the deep slump in housing, a lingering credit crunch and rising oil prices will severely dampen consumer spending, the economy's main growth engine.

"The economy is facing a perfect storm right now of a crisis-related tightening of credit, higher oil prices and lower house prices," said David Jones, chief economist at DMJ Advisors, a Denver forecasting firm. "We are going to see a significant slowing in growth."

Jones forecast that the overall economy, as measured by the gross domestic product, will slow to a rate of 1.5 percent for this quarter and then even lower to 1.3 percent in the first three months of next year.

Other bothersome developments for the economy include a third consecutive drop — to the lowest level in two years — in the consumer confidence index in October.

From NPR reports and The Associated Press

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