The Federal Reserve lowered its benchmark interest rate by half a point to 3 percent, the second cut in nine days, and indicated its willingness to do so again to prevent a U.S. recession.
“Downside risks to growth remain,” the Federal Open Market Committee said in a statement after meeting Wednesday in Washington. In a reference to the volatility of the past five months, the Fed added that “financial markets remain under considerable stress and credit has tightened further for some businesses and households.”
The dollar tumbled and Treasury notes weakened after the decision as traders anticipated another reduction at the Fed’s March meeting, if not before. The cumulative reduction in rates since Jan. 22 is the fastest easing of monetary policy since 1990.
“They’re going full-bore trying to keep the economy from recession,” said David Resler, chief economist at Nomura Securities International Inc. in New York. “Conditions in the market place are the driving force right now. Factual data support it.”
Fed officials said they will continue to assess financial markets and the economy “and will act in a timely manner as needed.”
Chairman Ben S. Bernanke and the Fed’s Board of Governors also voted to cut the discount rate, the cost of direct loans from the central bank, to 3.5 percent from 4 percent.
Dallas Fed President Richard Fisher dissented from Wednesday’s decision, preferring no change.
Policymakers presented revised three-year economic forecasts at this week’s gathering. The Fed will release the projections along with minutes of the meeting on Feb. 20.
Wednesday’s Commerce Department figures showed the Fed’s preferred inflation gauge rose at a 2.7 percent annualized rate last quarter. Fed officials in October forecast the personal consumption expenditures price index minus food and energy would rise 1.6 percent to 1.9 percent in 2010, offering a measure of their longer-term inflation objective.
“The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully,” the Fed said in Wednesday’s statement.
Fed policymakers have struggled since August to contain the economic damage sparked by the worst housing recession in a quarter-century. The world’s largest banks and securities firms have recorded more than $133 billion in asset write-downs and credit losses since the beginning of 2007, which analysts blamed on weak and fragmented supervision and poor credit analysis.
Foreclosure rates rose 75 percent in 2007 as a record amount of adjustable-rate loans to borrowers with weak or limited credit histories reset to higher rates, RealtyTrac Inc. data show. Home prices in 20 U.S. metropolitan areas fell 7.7 percent in November from a year earlier, the 11th consecutive decline, the S&P/Case-Shiller home-price index showed yesterday.
“We are in a historic housing bust right now, comparable to that of the Great Depression,” said Robert Shiller, chief economist of MacroMarkets LLC in Madison, New Jersey, who co- founded the house-price index. “The unraveling of that has unpredictable consequences.”
Fed officials waited until September to cut the benchmark lending rate, even though premiums on corporate bonds and lower- rated securities began to climb in late June.
Bernanke used a Jan. 10 speech to update the public. “The baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced,” he said, breaking with the Fed's statement a month earlier which only expressed “uncertainty” about the outlook. He pledged “substantive additional action as needed."