Fed Lowers Key Interest Rates by Quarter Point

October 31, 2007 No Comments »

The Federal Reserve cut key interest rates by a quarter point Wednesday, citing the need to support the distressed housing and financial sectors.

The federal funds rate now sits at 4.5 percent, while the discount rate was also lowered to an even 5 percent.

The prime rate, which is tied to home equity lines of credit and credit card interest rates, is also expected to be lowered by banks to 7.5 percent.

Ben Bernanke and friends seemed positive about the U.S. economy, though they acknowledged the ongoing impact of the mortgage crisis.

“Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance,” the Fed said in a statement.

“However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.”

The rate cut is the second since September, when the Fed cut interest rates by a half-percent in response to the worsening credit crunch and continuing housing crisis.

The Fed believes the rate cut should hinder some of the adverse affects of the credit markets, while promoting moderate growth over time.

The chances of further rate cuts were dampened however, as energy and commodity prices hitting highs put renewed upward pressure on inflation, with the risk of slower growth and inflation about even.

“The committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth,” the FOMC statement said.

Gross domestic product was unexpectedly strong in the third quarter, growing at an annual rate of 3.9 percent, according to an early estimate Wednesday by the Commerce Department.

The vote to lower key interest rates was won by a 9-1 vote, with Kansas City Fed President Thomas Hoenig opposed to a rate change.

The next scheduled Fed meeting is set for December 11.

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