- The Washington Times - Wednesday, October 29, 2008

The Federal Reserve this afternoon slashed interest rates by another half percentage point, citing a sharp downturn in the economy led by fearful consumers pulling back on spending.

The central bank said it acted because consumers are likely to be further spooked by the turmoil in the stock market and freeze in credit markets in recent weeks, presenting a danger of deep recession in the United States. Just yesterday, the Conference Board reported that consumer confidence plunged by the most on record as worries about disappearing stock wealth and jobs surged to the forefront of consumer thinking.

Economists estimate that consumer spending, which fuels 70 percent of economic activity, is falling at a 2.5 percent rate after adjusting for inflation.

Even consumers who would like to spend are having trouble doing so because of a shortage of credit available from banks, the Fed noted. “The intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

The rate cuts and numerous other Fed maneuvers pumping money into the banking system this year have been aimed at restoring health to the credit markets and encouraging banks to lend more. Nevertheless, a monumental retrenchment in financial markets has persisted since mid-September, with only moderate responses to the Fed’s ministrations.

Financial markets responded mildly to the Fed’s rate cut, which was largely anticipated. The Dow Jones Industrial Average was up 7 points at 3:10 p.m.

Because of the pervasive fears that are freezing up financial markets, some analysts questioned whether the Fed’s rate cut would do much good.

“It does not address the leverage and credit issues in the banking system” which are stymieing lending, while it “penalizes savers,” who are earning miniscule interest rates on their savings deposits, said Martin Hutchinson, analyst at Breakingviews.com.

Joachim Fels, economist with Morgan Stanley, said the strenuous efforts of the Fed and other world central banks are needed, however, and eventually will bear fruit.

“Monetary policy will eventually get traction, though the timing is highly uncertain,” he said. “And if the policies used so far don’t work, we believe the central bank and government won’t shy away from even more unorthodox measures.”

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