WASHINGTON — The Federal Reserve pressed ahead Wednesday with one of its most aggressive rate-cutting campaigns ever in an effort to ease the effects of a housing slump, a credit crunch and a possible recession. And the central bank left itself room to shrink interest rates again if necessary.
Brushing aside concerns that it was doing the bidding of the securities markets, the Fed cited troubled financial conditions as its primary motivation in chopping its benchmark interest rate by half a percentage point to 3% -- just eight days after making an emergency reduction of three-quarters of a point.
Only once since the early 1990s has the agency moved so swiftly to reduce the cost of borrowing.
"It's pretty clear by now that the Fed is ready to embrace the need . . . to stem the deterioration in financial conditions," said Robert V. DiClemente, chief U.S. economist for Citigroup Inc.
"We're encircled with threats to growth and the Fed is saying, 'Enough! We're going to quarantine some of the problems and insulate the healthy parts of the economy,' " he said.
The Fed acted on the same day a Senate panel approved an economic stimulus package that would offer lower tax rebates -- but give them to many more people -- than a measure passed by the House and endorsed by the Bush administration.
For consumers, the latest rate cut will mean a further lowering of costs on some adjustable-rate mortgages, credit card accounts and other debt linked to the so-called prime rate, which major banks began trimming late Wednesday in lock step with the Fed's action. The lower prime rate also will cut costs on many business loans. And fears of a recession have already sliced yields on long-term Treasury bonds, bringing rates on fixed-rate mortgages under 6%.
The lower borrowing costs theoretically will encourage spending throughout the economy. But this time economists are less certain about the future. Even with access to cheaper money, a badly shaken financial system may be slow to make new loans. A similar reluctance to act could manifest itself among consumers if sinking home prices, rising unemployment and other factors make them uneasy.
