StarBulletin.com

Fed weighs rate cut as economy teeters


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POSTED: Wednesday, October 29, 2008

WASHINGTON » Disappearing jobs, burrowing consumers and skittish companies are reasons for the Federal Reserve to ratchet down interest rates and brace the tottering economy.

Fed Chairman Ben Bernanke and his colleagues opened a two-day meeting yesterday afternoon - their last before the November elections - to make a fresh assessment of economic and financial conditions and decide their next move on rates. Their decision - widely expected to be a rate reduction - the second in two weeks - will be announced today.

Betting on a hefty rate cut, Wall Street staged an energetic rally. The Dow Jones industrials zoomed 889.35 points, its second-largest point gain ever.

Investors and many economists are predicting the Fed will slash its key rate by half percentage point to 1 percent. A few think the Fed will opt for a smaller, quarter-point reduction to 1.25 percent.

“;I'm torn,”; Stuart Hoffman, chief economist at PNC Financial Services Group, said about the size of the cut. “;Clearly, the economic outlook has weakened,”; he said.

Whatever the size of the rate cut, commercial banks' prime lending rate for millions of consumer loans would drop by a corresponding amount. The prime rate is now at 4.5 percent and is used to peg home-equity loans, certain credit cards and other floating rate loans.

Under either scenario - a half-percentage-point or a quarter-point cut - both the Fed's key rate and the prime rate would fall to their lowest in more than four years.

In grim news, consumer confidence plunged to its lowest level on record. The Conference Board reported yesterday that its index dropped to 38 in October, from 61.4 in September. That bunker mentality makes it more likely shoppers will retrench even more, throwing the economy into a tailspin.

Underscoring one of the big stresses Americans are under: the value of homes - people's biggest asset - dropped by record amounts.

The Standard & Poor's/Case-Shiller 20-city housing index released yesterday showed a drop of 16.6 percent in August from the year ago, the largest on record going back to 2000. The smaller, 10-city index, fell 17.7 percent, the biggest decline in its 21-year history.