Extreme heat warning in effect through Sunday

MPR News helps you turn down the noise and build shared understanding. Turn up your support for this public resource and keep trusted journalism accessible to all. 

Turn Up Your Support

The Federal Reserve, acting in coordination
with other global central banking authorities, cut a key U.S.
interest rate by half a percentage point Wednesday to steady an
economy teetering on a collapse reminiscent of the 1929 stock
market crash.
      

Fed Chairman Ben Bernanke and his colleagues ratcheted down
their key rate by 0.5 percentage point to 1.5 percent. The action
revives the central bank's rate-cutting campaign which had been
halted in June out of concerns that those low rates would worsen
inflation. Since then, however, economic and financial conditions
have dangerously deteriorated, forcing the Fed to reverse course.
      

The fact that the Fed felt it couldn't wait until its regularly
scheduled meeting on Oct. 28-29, underscored the urgency of the
situation.
      

The Fed took the action in a coordinated move with other central
banks, which also were cutting their rates.
      

"The pace of economic activity has slowed markedly in recent
months," the Fed said "Moreover, the intensification of financial
market turmoil is likely to exert additional restraint on spending,
partly by further reducing the ability of households and businesses
to obtain credit."
      

Although inflation has been high, the Fed believes that the
recent drop in energy prices and the weaker prospects for economic
activity have reduced this threat to the economy.
      

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.
      

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.
      

Spooked consumers and businesses have pulled back so much that
some analysts fear the economy stalled - or even worse, shrank - in
the July-to-September quarter. Many predict the economy will
contract in both the final quarter of this year and the first
quarter of next year, meeting the classic definition of a
recession.
      

The financial crisis that intensified in September is forcing a
seismic shake-up on Wall Street.
      

Lehman Brothers, the country's fourth-largest investment bank,
filed for bankruptcy protection. A weakened Merrill Lynch, deciding
it couldn't go it alone anymore, found help in the arms of Bank of
America. 

American International International Group was thrown a
financial lifeline. And, the last two investment houses - Goldman
Sachs and Morgan Stanley - decided to convert themselves into
commercial banks to better weather the financial storm. The number
of banks that have failed this year are up sharply from last year.


On Friday, Wachovia Corp. said it will be acquired by Wells Fargo &
Co. wiping out Wachovia's previous plan to sell its banking
operations to rival suitor Citigroup Inc.
      
      (Copyright 2008 by The Associated Press.  All Rights Reserved.)

Gallery

McCain would buy bad homeowner mortgages

Poll: Economy costs Coleman lead in Senate race

Bernanke: More economic pain ahead

Business and Economic News

The Federal Reserve cut a key U.S.
interest rate by half a percentage point this morning to steady an
economy teetering on collapse.

Fed orders emergency rate cut to 1.5 percent

Go Deeper.

Like this?