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By Carol Hazard

RISMEDIA, Oct. 31, 2008-(MCT)-The Federal Reserve Bank lowered a key interest rate by a half a percentage point Wednesday in the latest attempt to restore confidence in an economy hit by the worst financial crisis in decades.

Major banks responded by lowering the prime rate, the interest rate they charge their best customers, to 4% from 4.5%.

The lower rate will affect some consumer loans, including auto loans, home equity lines of credit and some mortgage loans and credit cards.

The central bank reduced the federal funds rate, the interest banks charge each other on overnight loans, to 1%, the lowest its been since 2003.

The cut was the second in the funds rate this month. The Fed slashed the rate by a half percentage point in a coordinated move with foreign central banks on Oct. 8.

“It was not a big surprise,” said Dean Croushore, associate economics professor at the University of Richmond. “The markets were anticipating it.”

Since rates are already low, the reduction was more of a psychological boost, Croushore said. “People have to get more confidence that the economy will turn around eventually.”

The injection of funds into banks from the government and the unwinding of complicated securities will have more long-lasting affects on the economy than the rate cut, he said.

The Federal Open Market Committee, in its statement yesterday, said the financial turmoil is likely to curtail consumer and business spending.

“The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures,” according to the statement.

The Fed also noted that growth might not be as good as previously expected and a lot of uncertainty remains in the outlook, said Christine Chmura of Chmura Economics & Analytics in Richmond.

The expectation is the Fed will reduce the federal funds rate by another half a percentage point when it meets again Dec. 16, Chmura said.

The last time the rate fell below 1% was in 1958, when Dwight D. Eisenhower was president.

“A reduced rate takes nine months to a year to filter through the economy,” Chmura said. “Most economists expect the recession to last through the third quarter of next year.”

Over the past 13 months, the Fed has cut the federal funds rate from 5.25% to 1%. “It has been very aggressive in easing 1/8rates3/8 and that should have some impact on the economy,” Chmura said.

The Fed’s action should help keep adjustable rate mortgages low, notably those tied to Treasury rates, she said.

People buying cars also should see lower interest rates, although credit is more difficult to obtain. “Those with good credit should be able to make purchases at lower rates,” Chmura said.

The stock market responded by bouncing up and down yesterday, although not as wildly as in previous days, before two of the major indexes wound up slightly lower.

“The market was happy and sad,” said Russell Lundeberg, chief investment officer of Barrett Capital Management in Midlothian.

Copyright © 2008, Richmond Times-Dispatch, Va.
Distributed by McClatchy-Tribune Information Services.