Fri, May 02, 2008 - Page 1 News List

Wall Street shows concern as Federal Reserve cuts rates


Scrambling to shore up the faltering economy, the US Federal Reserve cut interest rates to the lowest point in nearly four years as the US teetered on the edge of recession.

Wall Street rallied at first on Wednesday but then pulled back, concerned that the reduction might be the last for a while.

In fact, the Fed’s trim was smaller than those of recent months amid indications the central bank might pause to see if months of powerful rate-cutting medicine and billions of dollars in stimulus checks will be enough to lift the country out of its slump.

Fed Chairman Ben Bernanke led a split decision — in an 8-2 vote — to slice the key rate by a quarter percentage point to 2 percent.

In turn, the prime lending rate for millions of consumers and businesses fell by a corresponding amount, to 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans. Both rates are the lowest since late 2004.

The Fed, which has been dropping rates since September, turned much more forceful early this year when housing, credit and financial problems worsened. Rate reductions in January and March alone marked the most aggressive intervention in a quarter-century in an effort to re-energize consumers and businesses.

“The substantial easing of monetary policy to date ... should help to promote moderate growth over time and to mitigate risks to economic activity,” the Fed said, strongly hinting that more cuts may not be needed.

Enthusiastic Wall Street investors drove the Dow Jones industrial average up more than 178 points — lifting it above 13,000 for the first time since early January — right after the Fed action. Then traders turned cautious, and the index ended the day 11.81 points below where it started.

Although the Fed didn’t take another reduction off the table, a growing number of economists believe the central bank is winding down its rate-cutting campaign.

Barring another hit to economic growth, they believe rates probably will stay where they are — perhaps through the rest of this year — in part because the Fed is concerned that further cuts could join with galloping energy and food prices and spread inflation dangerously higher.

By all accounts, the country’s economic health is fragile.

The economy crawled ahead at a pace of just 0.6 percent from January through March as housing and credit problems forced consumers and businesses to hunker down, the US Commerce Department reported hours before the Fed’s action. Growth had been just as feeble in the prior quarter.

Job losses in the first quarter neared the staggering quarter-million mark, and a government report today is expected to show that employers shed jobs again last month. The unemployment rate last month is expected to creep higher from 5.1 percent in March and hit 6 percent early next year, analysts say.

“Recent information indicates that economic activity remains weak,” the Fed said. “Household and business spending has been subdued, and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.”

Two Fed members — Charles Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas — opposed cutting rates on Wednesday.

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