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31 January 2008

New york times"----

WASHINGTON — The Federal Reserve cut short-term interest rates on Wednesday for the second time in eight days, meeting Wall Street hopes for cheaper money. At the same time, the Senate continued work on a $161 billion plan to prop up Main Street with tax rebates and temporary tax cuts.
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The New York Times

In lowering its benchmark federal funds rate by half a percentage point, to 3 percent, the central bank signaled that it was ready to err on the side of boldness in fending off a possible recession. It also left open the possibility of additional rate cuts in the months ahead.

The Fed’s move was part of a one-two punch by Washington aimed at jolting the economy with easier credit and extra money. Senate Democrats advanced a fiscal stimulus bill that could inject $161 billion into the economy this year through tax rebates for individuals and tax breaks for businesses.

If anyone needed more evidence that the economy is stumbling, it came just hours before the Fed announced its decision. The Commerce Department reported that the economy went into a stall in the last quarter of 2007, estimating that growth slowed to an annual rate of 0.6 percent, from 4.9 percent in the third quarter.

Despite some disagreement, all of the major power centers in Washington — the White House, Congress and the Federal Reserve — are in broad agreement about the need to bolster the economy with both fiscal and monetary policy.

The Senate Finance Committee passed a stimulus package on Wednesday that was more expensive than one the House passed on Tuesday, but only three Republicans on the panel voted for it, in a signal that bipartisan cooperation may be faltering.

President Bush, in a speech at the Robinson Helicopter Company in Los Angeles, repeated his call for the Senate to move fast. “I understand people having their points of view, and of course, we welcome points of view in Washington,” Mr. Bush said. “There appears to be a lot of them up there.”

The big rate cut initially prompted a rally in stock prices, with the Dow Jones industrial average jumping more than 100 points immediately after the Fed announcement. But the relief was quickly overshadowed by anxiety about another wave of potential losses tied to subprime mortgage defaults.

The major stock indexes ended the day slightly below where they had started after reports that credit-rating agencies were poised to lower their ratings on several companies that insure bonds containing packages of mortgages. The ratings moves would very likely reduce the value of billions of dollars’ worth of these so-called mortgage-backed securities.

Many economists are far from convinced that even a combination of tax rebates and cheaper money would prevent a recession. And in a sign that bond investors are fretting that the moves could lead to higher inflation, yields on 10-year and 30-year Treasury bonds edged up slightly on Wednesday.

But both Congress and the Fed were under heavy pressure to provide reassurance to their respective constituencies.

“Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” Fed officials said in a statement accompanying their rate decision. Noting that “downside risks remain,” the Fed said it would “act in a timely manner as needed to address those risks.”

The Fed’s action was its second big rate reduction in eight days and its fifth rate cut since September. All told, the central bank has reduced overnight lending rates by 1.25 percentage points since Tuesday of last week and by 2.25 percentage points since August.

By comparison, under its former chairman, Alan Greenspan, the Fed reduced the overnight rate by only a half-percentage point after the terrorist attacks on Sept. 11, 2001, though it eventually pushed its benchmark rate as low as 1 percent in 2003 to encourage an economic recovery.

The Fed’s move on Wednesday came after it electrified investors on Jan. 22 with an even bigger surprise rate cut of three-quarters of a percentage point at a rare unscheduled meeting.

Among investors, the big uncertainty was whether Ben S. Bernanke, the Fed chairman, would persuade his colleagues to cut rates by one-half percentage point or just one-quarter.

Investors were betting heavily that the Fed would choose the bolder of the two choices, and many analysts predicted that investors would pummel stock prices if the Fed disappointed them.

But Fed officials were already under fire from two directions at once — from investors and analysts on Wall Street who complained that the Fed had responded too timidly to signs of a downturn, and from a small but significant number of economists who complained that policy makers were being pushed by the stock market into rash decisions.

The decision by the Fed’s policy-making committee provoked one dissenting vote by Richard W. Fisher, president of the Federal Reserve Bank of Dallas, who favored no change in interest rates, but other well-known skeptics about rate reductions voted in favor.

“The message came through loud and clear that they are embracing the need for an accommodative monetary policy,” said Robert V. DiClemente, an economist at Citigroup. “This is Volckeresque in terms of the leadership it signified,” Mr. DiClemente added, alluding to Paul A. Volcker, the former Fed chairman who pushed up interest rates to double-digit levels in the late 1970s and early 1980s to stifle inflation.

But while many analysts praised Mr. Bernanke and the Fed for their decisiveness, some said the Fed had become unpredictable and might end up acting capriciously.

While it is clear that economic growth has slowed sharply, the evidence of a looming recession is still ambiguous. Housing construction and home sales have both plunged by more than half over the past 12 months, and home prices are declining in most parts of the country. Over all, the housing market shows no sign yet of having hit bottom.

Retail sales were sluggish during the crucial holiday season, but the government estimated on Wednesday that consumer spending climbed at a modest but respectable pace of about 2 percent during the fourth quarter of 2007.

Job creation slowed to a crawl in December, according to the Labor Department’s preliminary estimate. But many analysts now predict that the Labor Department, which reports on Friday about January employment, will estimate that the nation added about 100,000 jobs this month, up sharply from an estimated 18,000 new jobs in December.

Inflation, meanwhile, is running higher than Fed officials would like. In its report on Wednesday about economic growth in the fourth quarter, the Commerce Department estimated that consumer prices, excluding energy and food, climbed at an annual pace of 2.7 percent. The Fed’s unofficial comfort zone for inflation is between 1 and 2 percent.

Ethan Harris, an economist with Lehman Brothers, said Mr. Bernanke had moved into uncharted territory by putting so much emphasis on reducing the risk of a downturn before one actually materialized.

“I don’t have a huge objection to the Fed aggressively pushing down interest rates, but it does seem a little erratic for the Fed to be flip-flopping from worrying about inflation to cutting rates like this,” Mr. Harris said.

In Washington, Congressional leaders were focused on how they could add to what the Fed was already doing.

The stimulus bill approved by the Senate Finance Committee Wednesday would cost $157 billion in 2008 and $193 billion over two years, roughly $32 billion more than the bill the House passed on Tuesday.

But at the very least, the effort by Senate Democrats to advance their own plan would create some delay in getting a bill to the White House for the president’s signature, because it would require Senate and House leaders to reconcile different plans.

Both the House and Senate proposals offer tax rebates and business incentives to encourage spending. The Senate package would provide tax rebates of up to $500 for individuals and $1,000 for couples, to be phased out for incomes over $150,000 and $300,000, respectively.

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