Interest Rates

Here is the statement issued Tuesday by the Federal Reserve: The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points [three-quarters of a point] to 3.5%. The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth.

When the Federal Reserve cut a key interest rate by three-quarters of a point this week to bolster the U.S. economy, the Bank of Japan's board of governors could only watch and wish it had room for that kind of aggressive action. In Japan, the prime rate is just 0.5%. With borrowed money already nearly free, the central bank can hardly prime a stumbling economy -- the second-largest behind America's -- with even cheaper cash.

Has the Federal Reserve painted itself into a corner? That's one question on investors' minds as central bank officials convene for a two-day meeting today to consider a further interest rate cut. The session comes as the Fed tries to walk a monetary tightrope: attempting to address concerns that the U.S. economy may be tipping into a recession without looking as if it is being pushed by panicky stock-market traders to take steps that could promote inflation.

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.

The government should not be in charge of the economy. The government is super-insecure and desperate to be liked, as anyone would be if his or her popularity got put to a public vote every few years. So when the government senses you might blame it for something -- such as the fact that you spent $1 million on a three-bedroom house, and now you owe a ridiculous $1 million for a lousy three-bedroom house -- it panics like a grandparent and sends you a small check in the mail.

More people are applying for home loans, but that doesn't mean they are getting them. In a rare piece of good news for the mortgage industry, applications for home loans rose last week to a nearly four-year high after a sharp drop in interest rates on 30-year fixed-rate loans. Much of the surge in applications since the start of the year has been from homeowners looking to refinance at lower rates.

British consumers and retailers welcomed a cut in interest rates Thursday with relief and pleas for more, while the euro zone's central bank held rates steady but left the door open for a cut this year. The prospect for rate cuts in the 15-nation euro zone and for further reductions in Britain pushed the dollar up sharply. The euro sank to $1.4459 in late New York trading from $1.4628 late Wednesday. The pound dropped to $1.9405 from $1.9601.

Facing pressure from Congress and consumer advocates, lenders are pledging to provide stronger evidence of their progress in reworking costly home loans to prevent borrowers from being foreclosed. Under a plan endorsed by the White House, lenders have agreed to freeze interest rates on certain troubled mortgages and to guide qualified borrowers into more-affordable loans. The plan is aimed at averting massive foreclosures as floating-rate loans adjust to higher payments.

It was easy for many small investors to ignore the credit markets' woes a few months ago, when the crisis was centered in high-risk mortgages owned by big-money investors. Now, the credit crunch is getting a lot more up-close and personal for investors in markets far afield from dicey home loans -- including municipal and corporate bonds. As in a bad horror movie, the monster's tentacles are groping around.