Fed cuts key interest rate for a second time to guard against recession threats

WASHINGTON — The Federal Reserve, confronted by surging oil prices and a slumping housing market, cut a key interest rate by one-quarter of a percentage point Wednesday. But policymakers signaled that may be all the rate relief the economy needs right now.

The central bank lowered the federal funds rate to 4.5 percent, as expected. While financial markets had hoped for a clear sign of further cuts, the central bank indicated that rate cuts in September and October may be enough to stave off the threats of a recession.

Economists worry that growth will slow dramatically over the final three months of the year because of the housing slump, a credit crisis and record-high oil prices. The Fed, however, sounded a more upbeat tone.

The Fed also cited continued worries about inflation and said it believed that after the two rate cuts, the risks between weak growth and higher inflation were roughly balanced.

"The odds of another rate cut at the December meeting are substantially less than they were before this statement," said David Jones, chief economist at DMJ Advisors in Denver. Jones said he still expected one more rate cut to deal with a weak economy, but it probably would come at the Fed's January meeting.

Commercial banks responded to the Fed's decision by announcing a quarter-point cut to 7.5 percent in their prime lending rate, the benchmark rate for millions of consumer and business loans.

Wall Street sagged a bit immediately after the announcement, but quickly regained its footing and rose by more than 120 points in late afternoon trading.

In a brief statement explaining its decision, Fed Chairman Ben Bernanke and his colleagues said they now judge that "the upside risks to inflation roughly balance the downside risks to growth."

Stating that risks are now almost balanced was seen as a signal that the Fed believes further rate cuts may not be necessary.

The Fed's decision came on a 9-1 vote. Thomas Hoenig, president of the Kansas City regional Fed bank, dissented and preferred no change.

The Fed had lowered the funds rate by one-half of a percentage point at its Sept. 18 meeting.

The Fed also announced Wednesday it was cutting its discount rate, the interest it charges on direct loans it makes to banks, by a quarter-point, to 5 percent.

Commenting on the economy, the Fed was more positive than last month, when it expressed concerns about the toll the credit crisis would take on housing and the overall economy.

"Economic growth was solid in the third quarter and strains in financial markets have eased somewhat on balance," according to the Fed statement.