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Fed Slashes Rates Again

The 50-basis-point cut puts the fed funds rate at 3%, its lowest level since 2005.
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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


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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.

The risks to the Fed's strategy were apparent in the GDP report, with an inflation gauge showing that core prices excluding food and energy grew at a rate of 2.7% in the fourth quarter. That was up from a 2% rate in the third quarter, and it marked the biggest quarterly increase since the spring of 2006.

Meanwhile, the Fed's combined reduction to its target rate for overnight loans between banks this month was 125 basis points -- the largest one-month move in the modern history of the central bank. That signals that Bernanke is willing to go to extraordinary lengths in an effort to shelter the U.S. financial system from the perils facing it amid a downturn in the nation's housing market, which some observers say is the worst in post-war history.

The move puts the Fed on course to push interest rates below the pace of inflation this year, which could inspire U.S. consumers to borrow and spend more at a time when the nation needs to boost its savings rate for the sake of its long-term economic growth prospects.

"Although the Fed's decision today to cut rates by an additional 50 basis points will no doubt be greeted by accolades in Washington and on Wall Street, cheaper money and easier credit are precisely the wrong tonic for America's ailing economy," said Peter Schiff, author of

Crash Proof: How to Profit from the Coming Economic Collapse

. "The current distress results from years of overly accommodative monetary policy which has inflated home prices, encouraged Americans to spend too much, and borrow far more than they could comfortably repay."