ECONOMY

Fed again slashes key interest rate

Cheaper credit might help housing market, but inflation fears remain.

By Neil Irwin
THE WASHINGTON POST
Wednesday, March 19, 2008

WASHINGTON — The Federal Reserve took another aggressive step in its campaign to prevent a potentially devastating recession Tuesday, cutting a key interest rate by three quarters of a percentage point. The stock market rallied the most in five years, with the Dow Jones industrial average rising 420 points.

Fed policymakers cut the federal funds rate, at which banks lend to each other, to 2.25 percent. The Fed has slashed that rate by 3 percentage points since September, its most aggressive two months of action in a quarter-century.

That lower rate is expected to make it cheaper for Americans to take out adjustable-rate mortgages and borrow money through credit cards or auto loans, and for businesses to borrow money to expand.

But the Fed’s action could also help fuel inflation, some economists said. By reducing the interest rate that the central bank charges financial institutions for short-term loans, the Fed makes money more readily and cheaply available. If it miscalculates, it can pump too much money into the economy, fueling excessive demand for goods, housing and capital spending — and driving up prices.

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Tags: economy, fears, fed, housing market, inflation, interest rates, mortgages, real estate by Aria
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