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

The central bank said the pace of the economic expansion "will likely slow in the near term, partly reflecting the intensification of the housing correction."

The Fed met on the same day the government announced that the overall economy grew at a stronger-than-expected 3.9 percent rate from July through September.

Many economists believe growth will dip to around 2 percent from October through December and may slow even further, to about 1 percent, in the first three months of 2008.

The Fed said the reading on core inflation, which excludes energy and food, had "improved modestly this year." But the central bank worried about what the recent increases in energy prices and other commodities might do to inflationary pressures.

The committee said "some inflation risks remain," a signal it will be hesitant to cut rates further because of concerns on inflation.

The Fed had pushed the federal funds rate up a record 17 consecutive times in quarter-point moves over two years. The last increase was in June 2006.

From that time until last month, the rate did not change. The Fed watched to see whether its credit tightening had the desired effect of slowing the economy enough to lessen inflationary pressures.

But the worst housing downturn in more than two decades has threatened the Fed's goal of slowing growth and containing inflation.

Economists worry that the credit crisis this summer will make home sales and prices fall even more, undermining consumer confidence and causing consumers to cut back on spending.

Bernanke, who took over as Fed chairman in February 2006 from Alan Greenspan, came under criticism in August when the Fed left rates unchanged and said inflation was the primary economic threat.

But two days after that meeting, when a severe credit crunch hit world financial markets, the Fed provided billions of dollars in cash to the U.S. financial system and cut the rate at which it makes direct loans to banks. Then, on Sept. 18, the Fed reduced the funds rate by one-half of a percentage point, which was more than expected.

Lyle Gramley, a former Fed board member and now an economist with Stanford Financial Group, put the chances of a recession at around 40 percent. He said the Fed's primary concern is what is happening in housing and how much of a spillover that will have on the overall economy.

"It is possible that the housing industry will take us over the edge into a recession," he said. Gramley noted that every housing downturn of the past 60 years, except for two, have triggered recessions.