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Fed Considers Another Rate Reduction

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The Associated Press

Published: January 30, 2008

WASHINGTON - Individuals and businesses are likely to see their borrowing costs drop further as the Federal Reserve weighs another interest-rate reduction to bolster a sagging economy.
Fed chairman Ben Bernanke and his colleagues opened a two-day meeting Tuesday afternoon to plot their next move on interest rates. The closed-door gathering comes amid growing fears that the country is either on the brink of a recession or has already started slipping into one given the strains from a housing market collapse, a global credit crunch and turbulence on Wall Street. The country's last recession was in 2001.

Many economists predict the Fed will lower its key rate, now at 3.5 percent, by as much as half a percentage point to 3 percent, when policymakers wrap up their meeting this afternoon.

If that scenario plays out, commercial banks would be expected to lower their prime lending rate by a corresponding amount - from 6.5 percent to 6 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans. Should all this happen, then both the Fed's key rate and the prime rate would be at nearly three-year lows.

In an emergency gathering convened by Bernanke last week, the Fed ordered a rare, 3/4 -point reduction to its key rate. That move came after stocks worldwide plummeted, intensifying recession fears. The Fed's action has helped to restore some confidence among skittish investors. However, financial markets remain fragile.

"My feeling is if they don't cut by a half-point, they risk undoing the good they did last week with the 3/4 -point cut," said Mark Vitner, economist at Wachovia.

The Fed's rate-cutting campaign, which started in September, is not only aimed at energizing the economy but also providing a psychological boost to investors and consumers, whose spending is vital to the economy's well-being.
Consumer confidence fell sharply in January, The Conference Board reported Tuesday. The survey, however, was taken before the Fed's cut last week and before the White House and House leaders announced an agreement on an economic stimulus package including tax rebates for people and some tax breaks for business.

The big worry is that consumers will clamp down on spending and businesses will put a lid on capital spending and hiring, throwing the economy into a tailspin.

Other economic news released Tuesday showed that factories saw demand for their products rise in December by the largest amount in five months. That, however, didn't change the broader picture of a weakening economy.

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