Fed drops key rate for third time this year

Staff and Wire Reports

WASHINGTON — The Federal Reserve dropped its most important interest rate to a nearly two-year low on Tuesday and left the door open to additional cuts to prevent a housing and credit meltdown from pushing the economy into a recession. A disappointed Wall Street took a nosedive.

Fed Chairman Ben Bernanke and all but one of his colleagues agreed to trim the federal funds rate by one-quarter percentage point to 4.25 percent.

The rate reduction, the third this year, was needed to energize national economic growth, Fed officials explained. The deepening housing slump is affecting the behavior of consumers and businesses alike, they said.

Sue Stockly, an economics professor at Eastern New Mexico University, agreed that the Feds are cutting the interest rate to “try to stave off a recession.”

“There are some indications that the economy might be slowing down, and any time the economy slows down people lose jobs,” Stockly said. “That’s the big worry right now, that and the unemployment rate might go up.”

“Economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks,” the Fed said in a statement explaining its decision to cut rates again. The three rate cuts ordered thus far “should help promote moderate growth over time,” the Fed added.

Stockly said the potential impact of the rate cut locally is hard to determine. She also said the slow-down in the local housing market isn’t the result of prime lending rates, but rather the effect of changes at Cannon Air Force Base.

However, consumers are likely to see lower interest rates on bank loans, credit cards and mortgages in the near future, Stockly said.

“It takes a little bit for it to trickle down,” she said.

From July through September, the economy logged its best growth in four years. But it is expected to slow to a pace of just 1.5 percent or less over the final three months of the year as the housing collapse and credit crunch chill consumers. The odds of a recession have grown.

With growth cooling, the unemployment rate, now at a relatively low 4.7 percent, is expected to rise. Analysts expect the jobless rate to climb to 5 percent by early next year.

High oil prices could complicate the Fed’s job of trying to keep the economy expanding and inflation low.

Oil prices, which had neared $100 a barrel, have moderated. But they are still high. High energy prices are a double-edged sword. They can slow economic activity and spread inflation if they cause the prices of lots of other goods and services to rise.

“They always say the high energy prices are like a double-edged sword,” Stockly said.

“Elevated energy and commodity prices, among other factors, may put upward pressure on inflation,” the Fed said. “Inflation risks remain,” the Fed said, adding that it “will continue to monitor inflation developments carefully.” Some economists believed the Fed’s decision to go with a moderate quarter-point cut was a nod to those inflation concerns.