The most aggressive interest rate cuts in the Federal Reserve's modern history mean lower credit costs for consumers and businesses, relief for homeowners with adjustable rate mortgages, and a better chance to halt the economy's deterioration, analysts said.
Policy makers yesterday cut the Fed's benchmark interest rate by another half-point, just eight days after slashing it by three-quarters of a point in an emergency meeting. Such a cut in such a short time is unprecedented, analysts said, reflecting the extraordinary tur moil in financial markets and the subsequent damage to the economy caused by the meltdown in US housing markets.
Cutting interest rates boosts the economy by lowering borrowing costs and encouraging consumers and businesses to spend.
The Fed's benchmark, which influences virtually every other borrowing rate, now stands at 3 percent, the lowest level since May 2005. The Fed has cut the rate 2.25 points since September, including 1.25 points since Jan. 22, and many analysts expect policy makers to cut the rate again when they next meet in March.
"The medicine here is immense and front-loaded in the hope the economy will bypass recession and begin recovery," said Allen Sinai, chief economist at Decision Economics Inc., a Boston financial market advisory firm. "When you're trying to stimulate the economy, the only way is to cut rates big time."
Already, lower interest rates are beginning to have an impact. Mortgage rates, which are not directly tied the Fed's benchmark but are influenced by it, have slid more than a half point since the beginning of the month to about 5.5 percent, according to Freddie Mac, the government-created mortgage financing company.
As a result, mortgage applications, driven by refinancing, rose 71 percent last week from a year ago, the Mortgage Bankers Association reported yesterday.
Rates for personal and auto loans, and home equity lines of credit also are falling, according to Bankrate Inc., a firm that tracks US interest rates. Also benefiting: homeowners with adjustable rate mortgages scheduled to reset this year.
Resets are tied to short-term interest rate indexes affected by the Fed's benchmark, such as the 1-year Treasury, said Greg McBride, senior financial analyst at Bankrate. The rate on the 1-year Treasury has fallen nearly 3 points since the summer.
"Resets will be much more manageable in 2008," said McBride. "That could be the difference to holding onto your house."
Fed policy makers voted 9 to 1 for the half-point rate cut, with Dallas Federal Reserve Bank president Richard W. Fisher preferring to stand pat. In the statement announcing the rate cut, policy makers said the economy still remains at risk, citing turmoil in financial, credit and housing markets, and slowing employment growth.
Stock markets rallied immediately after the Fed announcement, but then fell on renewed recession fears, analysts said. The Dow Jones industrial average closed down 37.47 points to 12,442.83. The Standard & Poor's 500 index slipped 6.49 points to 1,355.81. The technology heavy Nasdaq Composite index fell 9.06 points to 2,349.00
"In a recession, earnings are going down, not up," said Al Goldman, chief market strategist at A.G. Edwards, a unit of Wachovia Corp. of Charlotte. "The Fed is worried, and investors are saying, 'Maybe I should be worried, too.' "
Recession worries have intensified in recent weeks as home sales, prices, and building continue to plunge, according to recent data, while high energy costs squeeze consumer spending, which drives about 70 percent of US economic activity. Yesterday, the Commerce Department reported the economy downshifted dramatically at the end of last year and nearly stalled.
The economy grew at an annual pace just above a half percent in the fourth quarter of 2007, compared to nearly 5 percent in the third quarter. Many economists forecast the economy will contract for at least one quarter this year, helping to push unemployment as high as 6 percent from the current 5 percent. Such a rise would increase joblessness by about 1.5 million workers.
Many analysts had criticized Fed chairman Ben Bernanke for not cutting rates fast and far enough to keep up with a deteriorating economy. But the Fed caught up with its recent bold actions, analysts said.
Brian Bethune, US economist at Global Insight, a Waltham forecasting firm, said the steep rate cuts should keep the economy afloat until federal spending aimed at stimulating the economy kicks in in the second half of the year. The House this week passed a $146 billion stimulus package that would, for most workers, generate rebate checks of $600 for individuals and $1,200 for households. The Senate has yet to act.
Interest rate cuts will be "enough to forestall a serious recession," Bethune said. "If the Fed had done nothing, we'd be in deep doo-doo."
Robert Gavin can be reached at rgavin@globe.com.
