WASHINGTON – In a bold strike, the Federal Reserve slashed a key interest rate by a half-point on Tuesday – the first cut in more than four years – and left the door open to further relief to prevent a painful housing slump and jarring credit crunch from driving the country into recession.
Wall Street responded enthusiastically, propelling stocks up more than 200 points. Politicians, shaken by record-high home foreclosures, also welcomed the move.
In a crucial and anxiously awaited decision, Federal Reserve Chairman Ben Bernanke and his central bank colleagues lowered an important interest rate to 4.75 percent. Economic and political pressure has been building on the Fed to act.
As a result, Wells Fargo, Bank of America and other commercial banks dropped their prime lending rate charged to millions of borrowers by a corresponding amount to 7.75 percent.
Whether Bernanke can handle the crisis successfully is the biggest challenge he has faced in his 19 months at the Fed helm.
“Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time,” the Fed said in a statement released after its closed-door meeting.
The Fed’s action means borrowers who can obtain credit should see rates drop on a variety of loans. It will become less expensive for people to finance certain credit card debt and for homeowners to take out popular home equity lines of credit, which often are used to pay for education, home improvements or medical bills.
And, it will provide relief to some homeowners whose adjustable-rate mortgages reset in the fall. Those rates will still go up but not by as much as they otherwise could have, analysts said.
Less immediate will be relief for the country’s economic health. An expected series of rate decreases could take three to nine months to ripple through the economy and bolster overall activity.
The aggressive action underscored the Fed’s resolve.
“The Fed has rolled out the heavy artillery here. Bernanke is not being timid,” said Brian Bethune, economist at Global Insight. “The Fed has seen the problems. It is not trying to put out a forest fire with a bucket of water,” he said.
Bethune and some other analysts predict the Fed will lower rates again – probably by a more modest one-quarter percentage point – at its next meeting in October. Another rate reduction could come in December, the last meeting of this year, if the economy were to falter.
But economist Richard Yamarone of Argus Research said he believes that no more help will be needed. “It is one and they are done,” he predicted.
The Fed’s economic assessment was somber.
“The tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally,” the Fed said.
Fears that the troubled housing market and credit problems could short-circuit the 6-year-old economic expansion have shaken Wall Street. Financial turmoil has intensified since the Fed’s last meeting in early August.
The biggest worry is that people and businesses will cut back on their spending and investment, throwing the economy into a tailspin.
“By going with a half-point reduction, Bernanke is eschewing a gradualistic approach. The patient – the economy – has a bad flu and you don’t want it to turn into pneumonia. So you don’t want to mess around,” said Terry Connelly, dean of Golden Gate University’s Ageno School of Business.
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