Fed Slashes Rates Again

Updated from 2:15 p.m.

Chairman Ben Bernanke's Federal Reserve offered up another half-point rate cut to investors on Wednesday, amid signs of malaise in the U.S. economy.

The decision comes on top of the Fed's emergency 75 basis point reduction last week, the first reduction of that size since 1982. Wednesday's move brings the central bank's fed funds rate target to 3%, the lowest it has been since 2005.

"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," the Fed said in its policy statement that accompanied the decision. "Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets."

The statement indicates that the Fed's chief concern stems from breakdowns in the financial markets in the midst of a lingering credit crunch that is the result of a loss of confidence on the part of lenders and investors related to the downturn in the U.S. housing market. Meanwhile, recent weakness in economic indicators is also a concern, said the Fed.

"Today's policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity," said the Fed. "However, downside risks to growth remain."

In describing "downside risks to growth," the Fed excluded the word "appreciable," which it used in its statement from last week. The change may indicate that the Fed sees less immediate risk in the current market environment, but the central bank hinted that further easing may be on the way, saying it "will act in a timely manner as needed to address those risks."

"The hint here is that they think further easing will be much slower, markets permitting," said Ian Shepherdson, chief U.S. economist with High Frequency Economics, in a note to clients.

Once again, Bernanke's committee had one dissenting voice. This time it was Dallas Fed Governor Richard Fisher. He preferred no change in the target for the federal funds rate at this meeting. Last week, St. Louis Fed Governor William Poole dissented from the Fed's decision, preferring to wait for a regularly scheduled meeting to take any action.

Stocks rallied from modest losses in the morning in response to the decision, as investors were banking on a half-point cut. Dow components Alcoa (AA Quote), ExxonMobil (XOM Quote) and Wal-Mart (WMT Quote) all turned sharply higher. Financials also jumped, with Citigroup (C Quote) recently up 1.9%, JPMorgan (JPM Quote) up 2% and Bank of America (BAC Quote) up 2.1%.

The Fed's decision comes after the Commerce Department reported early Wednesday that U.S. economic growth nearly stalled at the end of 2007, as its first reading of the nation's gross domestic product showed the measure rose just 0.6% in the fourth quarter, down from the 4.9% pace that was recorded for the third quarter.

The growth in GDP was well below expectations on Wall Street, where economists were forecasting growth of 1.2% on average. For all of 2007, the economy grew by just 2.2% -- its weakest performance in five years -- amid record declines in home prices, a dramatic spike in home foreclosures and tens of billions of dollars in losses at Wall Street banks from mortgage-related investments.

"The economy is in or near a recession, so only time will tell if this move is sufficient to avert further economic deterioration," said Kurt Karl, Chief US Economist for Swiss Re. "Since Fed monetary easing takes about a year to have its full impact on the economy, this will help cushion the growth slowdown but only by late this year and early next year."

The weak GDP report provided Bernanke with the breathing room he needed to meet expectations in the financial markets with a half-point rate cut. Some Fed-watchers thought the central bank should offer only a quarter-point cut or no rate cut at all after its January meeting, in order to minimize the risks to price stability posed by low interest rates.