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Fed Prepares Interest Rate Cut To Stave Off Recession

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By JEANNINE AVERSA, The Associated Press

Published: September 17, 2007

WASHINGTON - For the first time in more than four years, the Federal Reserve appears ready to lower interest rates to prevent a housing meltdown and a painful credit crunch from driving the economy into a recession.

A rate cut would affect millions of borrowers, with the intention of getting them to spend and invest more, which would revitalize the economy.

In one of their most important and anxiously awaited decisions, Fed Chairman Ben Bernanke and his central bank colleagues meet Tuesday to determine their next move on interest rates. Those policymakers are widely expected to cut an important rate, now at 5.25 percent, by at least one-quarter of a percentage point. Some analysts predict a bolder step, a half-point reduction.

If the Fed drops the rate, then the prime lending rate that commercial banks charge many individuals and businesses would fall by a corresponding amount. It now is at 8.25 percent.

'It's no longer a debate over whether they will ease but by how much,' said Mark Zandi, chief economist at Moody's Economy.com. 'The economy is soft and getting softer,' and the Fed has come under economic and political pressure to act.

Should the Fed go with a quarter-point cut, analysts expect policymakers will lower the rate again in October and in December, their final meeting of the year.

Fed action would mean that borrowers who can obtain credit would see rates drop on a variety of loans. It would become less expensive for people to finance certain credit card debt and for homeowners to take out popular home equity lines of credit, which often are used to pay for education, home improvements or medical bills.

Also, it should help some homeowners whose adjustable-rate mortgages reset in the fall.

'Borrowers facing a rate reset Oct. 1 might see their ARM rates adjust to 6.7 percent, for example, rather than the 7.5 percent that a borrower whose loan adjusted back on July 1 experienced,' said Greg McBride, senior financial analyst for Bankrate.com.

Less immediate would be relief for the country's economic health. An expected series of rate decreases could take three months to nine months before bolstering activity.

'It's like taking an antibiotic. After you take the first dose, you don't feel immediately better. But after a series of dosages accumulate, there will be a more positive effect,' said Stuart Hoffman, chief economist at PNC Financial Services Group.

Fears that the deepening housing slump and a spreading credit crisis could short-circuit the six-year-old economic expansion have shaken Wall Street over the past few months. Stocks have swung wildly, with sharp drops reflecting investors' bouts of panic.

A recent government report showing that the economy lost jobs for the first time in four years delivered a fresh jolt. The biggest fear is that individuals and businesses will cut back on spending, throwing the economy into a tailspin.

Problems have been most pronounced in housing.

After a five-year boom, the housing market went bust more than a year ago. Higher interest rates and weaker home values clobbered homeowners, particularly 'subprime' borrowers with spotty credit histories or low incomes. Foreclosures set records and late payments spiked. Lenders were forced out of business.

Bernanke repeatedly has pledged in recent weeks to 'act as needed' to keep the housing and credit mess from sinking the economy.

A CUT OF INTEREST

CHANGES: For the first time in more than four years, the Federal Reserve appears ready to lower interest rates to counteract a housing meltdown and credit crunch.

DOWN: The policymakers are widely expected to cut an important rate by at least one-quarter of a percentage point.

IMPACT: If this happens, the prime lending rate that commercial banks charge many individuals and businesses would fall by a corresponding amount.

Source: The Associated Press

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