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Fed orders emergency rate cut to 1.5 percent

(Agencies)
Updated: 2008-10-08 20:58

In addition, the Fed reduced its emergency lending rate to banks by half a percentage point to 1.75 percent. Given the intense credit crisis, banks have been ramping up their borrowing from the Fed's emergency "discount" window.

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In response, the prime lending rate for millions of borrowers will drop by a corresponding amount. The prime rate applies to certain credit cards, home equity lines of credit and other loans.

The hope was to spur nervous consumers and businesses to spend more freely again. They clamped down as housing, credit and financial problems intensified last month, throwing Wall Street into chaos. Many believe the country is on the brink of, or already in, its first recession since 2001.

The Fed's last rate cut was in late April, capping one of the most aggressive rate-cutting campaigns in decades as it scrambled to shore up the faltering economy. After that, the Fed moved to the sidelines, holding rates steady as zooming food and energy prices during that period threatened to ignite inflation. In the past few months, energy prices have retreated from record highs reached in mid-July, giving the Fed more leeway to drop rates again.

At its last meeting in September, the Fed struck a more dire tone about the economy, hinting that a rate reduction once again could be in the offing.

Even with the unprecedented $700 billion financial bailout quickly signed into law by President Bush on Friday, the failing economy and the jobs market probably will get worse. Many believe the economy will jolt into reverse later this year - if it hasn't already - and will stay sickly well into next year.

One of the most crucial pillars of the economy - the jobs market - has cracked, and wage growth is slowing. This means that consumers will be even more hard-pressed to spend in the fashion that helps grow the economy.

Increasingly skittish employers slashed payrolls by 159,000 in September, the most in more than five years. A staggering 760,000 jobs have disappeared so far this year. The unemployment rate is 6.1 percent, up sharply from 4.7 percent a year ago.

The unemployment rate could hit 7 or 7.5 percent by late 2009. If that happens, it would mark the highest rate of joblessness since the months immediately following the 1990-91 recession. Some economists say the jobless rate could rise even more before the situation starts to get better.

Mounting job losses, shrinking paychecks, shriveling nest eggs and rising foreclosures all have weighed heavily on American voters. The economy is their No. 1 concern, polls have shown.

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