U.S. Fed cuts interest rate again

The U.S. Federal Reserve decided Wednesday to cut a key interest rate by a quarter percentage point to 4.5 percent to help the economy survive the current housing slump and credit crunch. This was the second consecutive cut in the central bank's target for the federal funds rate, the interest rate that commercial banks charge each other for overnight loans, in one and a half months. On Sept. 18, the Fed lowered the key rate by an aggressive 0.5 percentage point to 4.75 percent from 5.25 percent, where it had stood at since June 2006. That was the Fed's first rate cut in more than four years. As a result of the Wednesday decision, commercial banks' prime lending rate, the benchmark for millions of consumer and business loans, will drop by a corresponding amount to 7.50 percent, once again giving borrowers some breathing room. The prime rate responds to changes in the federal funds rate. The latest rate cut came even as the economic growth rate accelerated slightly in the third quarter. Preliminary data released by the Commerce Department Wednesday showed that the U.S. economy expanded at an annual rate of 3.9 percent in the July-to-September period, the fastest pace since the first three months of last year. The gain in gross domestic product was up from a 3.8 percent pace recorded in the second quarter and exceeded the 3.1 percent growth rate expected by analysts. The faster-than-expected third-quarter growth pace suggests that the economy has been resilient and holding up well so far to the strains in the housing and credit markets. However, the overriding worry for the Fed is that the housing slump, the worst in 16 years, and tightening credit could seriously crimp spending and investing by people and businesses, dealing a dangerous blow to the economy. In the third quarter, business investment in commercial structures, such as office buildings and factories, grew 12.3 percent, down from the 26.2 percent rate in the second quarter. Residential fixed investment plunged 20.1 percent, much sharper than a drop of 11.8 percent in the second quarter. Meanwhile, a report by the Conference Board showed Tuesday that consumers' confidence in the economy sank to a two-year low in October. Earlier this month, the International Monetary Fund slashed its 2008 global economic forecast by 0.4 percentage point to 4.8 percent, warning that turbulence stemming from a crisis in the U.S. housing sector could crimp growth worldwide. The Fund also shaved its U.S. economic growth forecast by 0.1 point to 1.9 percent for this year and by a sharper 0.9 point to 1.9 percent for 2008, down significantly from the 2.9 percent growth rate in 2006. The greatest threat to the world economy is the financial market unrest stemming from the high-risk U.S. subprime mortgage sector, where loans were given home buyers with poor credit histories, the Fund said on Oct. 17 in its twice-yearly World Economic Outlook report.