Fed Expected To Cut Rates To Help Economy Survive Housing, Credit Woes

WASHINGTON (AP) – The Federal Reserve is expected to cut an important interest rate this week, a move designed to help the economy get through the stresses of a painful housing slump and credit crunch.

Fed Chairman Ben Bernanke and his central bank colleagues opened a two-day meeting Tuesday afternoon to assess the economic and financial challenges facing the country and plot their next move on interest rates.

Even as many await the Fed’s interest rate decision, it continues to pump sizable amounts of cash into the financial system to help companies get over credit humps. The Fed, in two operations on Tuesday, injected $17 billion in temporary reserves.

Many investors and economists are betting the Fed will follow up its bold, half-percentage-point rate cut in September with another, probably smaller, reduction when they wrap up their meeting on Wednesday. The federal funds rate will be lowered by one-quarter percentage point to 4.50, these analysts predict.

The federal funds rate affects many other interest rates charged to individuals and businesses and is the Fed’s most potent tool for influencing economic activity. If that happens, commercial banks’ prime lending rate – for certain credit cards, home equity lines of credit and other loans – would drop by a corresponding amount, to 7.50 percent.

The overriding worry for the Fed is that problems in housing and harder-to-get credit could seriously crimp spending and investing by people and businesses, dealing a dangerous blow to the national economy. Just a few hours before Fed officials gathered for their closed door meeting, a report was issued showing consumers’ confidence in the economy sank to a two-year low.

The Conference Board’s index fell to 95.6 in October, from 99.5 in September. The news rattled Wall Street, pulling stocks lower. Many analysts are hopeful the economy can avoid a recession, but the odds of one occurring have grown considerably since the start of this year. Some analysts, meanwhile, think there’s a chance the Fed will leave rates unchanged.

They believe the economy is sufficiently resilient to weather the financial storm. They also worry that surging oil prices, which have reached record highs in recent days, could spread inflation through the economy. For their own part, Bernanke and his fellow Fed officials have kept their options open about their next move.

They have cited much uncertainty about how all the various forces might ultimately affect economic activity. If Fed officials were to decide not to lower rates again, they run the risk of disappointing edgy investors on Wall Street and throwing stocks in a tailspin.

“The expectations for another rate cut by the Fed have moved probably more quickly than Fed policymakers would have anticipated,” said Lynn Reaser, chief economist at Bank of America’s Investment Strategies Group.

“At this point, it seems a cut of one-quarter point will be ordered as an insurance policy” against undue economic weakness developing, she said. The Fed in September lowered its key interest rate for the first time in more than four years.

It was seen as a pre-emptive strike to make sure housing and credit problems don’t sink the economy. The Fed’s aggressive action at that time prompted a rally on Wall Street, propelling the Dow Jones industrials up by nearly 336 points. It was the Dow’s biggest one-day point jump in nearly five years.

By JEANNINE AVERSA AP Economics Writer

(Copyright 2007 by The Associated Press. All Rights Reserved.)