TOPICS > Economy

Federal Reserve Trims Key Interest Rate

BY Admin  April 30, 2008 at 2:20 PM EST

Federal Reserve Chairman Ben Bernanke; file photo

The Fed’s action takes the federal funds rate to 2 percent, the lowest since December 2004.

Many economists believe policymakers will signal their intention to put rates on hold in a bid to fight inflation.

Earlier Wednesday, the Commerce Department said gross domestic product rose during the first quarter at a seasonally adjusted 0.6 percent annual rate. Analysts had expected the government to report a growth rate of 0.5 percent in the first quarter.

The announcement by Fed Chairman Ben Bernanke is the seventh reduction in the federal funds rate since the central bank began battling the credit squeeze and the growing possibility of a recession in September.

Policymakers also debated a new liquidity tool — paying interest on bank reserves — on Wednesday, according to Reuters.

“My best guess is that they want to buy a little more insurance against an economy that looks like it is in recession,” Lyle Gramley, a former Fed board member with the Stanford Financial Group, told the Associated Press.

The Fed delivered two three-quarter-point moves and one half-point cut over an eight-week period from mid-January to mid-March that represented the central bank’s most aggressive rate cuts in a quarter-century.

The quarter-point cut moves the funds rate to 2 percent, a full 3 percentage points below where it was on Sept. 18 when the Fed started cutting.

Consumer spending that fuels two-thirds of economic activity grew at the weakest rate since the second quarter of 2001, when the economy was last in recession. It rose at a 1 percent rate after growing 2.3 percent in the fourth quarter.

An already distressed housing sector showed even more weakening. Spending on residential construction plunged at a 26.7 percent rate — a ninth straight quarterly decline and the biggest for any three months since the end of 1981, according to Reuters.

Meantime, General Motors announced $3.3 billion in losses in the first quarter as strong overseas growth was offset by a strike at a supplier and weak U.S. sales, and Citigroup Inc. said late Tuesday it plans to sell $3 billion of common stock to boost its capital levels. The largest U.S. bank is raising more capital to offset more than $45 billion of write-downs and credit losses it has taken since June 30.