WASHINGTON — The Federal Reserve delivered powerful new relief to people and businesses squeezed by the ailing economy Wednesday, cutting interest rates ever deeper in an effort to avert or at least soften the blow of a recession.
The bold, half-point reduction approved by Fed Chairman Ben Bernanke and all but one of his colleagues came as President Bush and Congress raced to enact a separate rescue package — including tax rebates for individuals and tax breaks for companies — to help energize an economy in danger of stalling.
Commercial banks followed the Fed action by lowering their prime lending rate by the same half percentage point — to 6 percent, the lowest in nearly three years. That prime rate applies to certain credit cards, home-equity lines of credit and other loans.
Hours before the Fed’s action, the government reported that the nation’s economic growth had stumbled to a virtual halt. The economy grew at a 0.6 percent annual pace from October through December, and for all of 2007 it logged its weakest performance in five years.
The Commerce Department report pointed to worsening problems in the housing market and the fact that harder-to-get credit made individuals and businesses more cautious in their spending.
Fears of a recession have grown, even as inflation remained elevated.
For all of 2007, gross domestic product grew 2.2 percent. The housing collapse was the biggest culprit; builders slashed spending on housing projects by 16.9 percent on an annualized basis, the most in 25 years.
The fourth quarter’s performance was half the 1.2 percent annual pace that economists were expecting and marked a big loss of momentum from the third quarter’s 4.9 percent showing.
The collapse of the housing market, sour mortgage investments and harder-to-get credit are weighing on people and businesses alike.
Foreclosures have hit record highs, and banks have racked up multibillion-dollar losses. The fallout has shaken Wall Street, catapulted the economy to Topic A among worried families and galvanized political figures, including those vying to be the next president.
“The economy is hanging by a thread,” said Stuart Hoffman, chief economist at PNC Financial Services Group.
In its 9-1 decision, the Federal Reserve dropped the federal funds rate to 3 percent at the end of a two-day meeting. Richard Fisher, president of the Federal Reserve Bank of Dallas, was the sole dissenter. He preferred no change.
“Credit has tightened further for some businesses and households,” the Fed said. “Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.”
Wall Street rallied after the rate cut but then pulled back, still wary. The Dow Jones industrials jumped more than 200 points but finished the day down 37.47.
“The economy has been subject to something of the perfect storm here. It has been hit by the housing slump, the credit squeeze, the subprime slime and stock-price declines on Wall Street,” said economist Ken Mayland, president of ClearView Economics. “The economy is weathering some pretty stormy seas, but it is weak.”
