WASHINGTON -- The Federal Reserve staged another pre-emptive strike against a potential economic slowdown yesterday, cutting short-term interest rates by a quarter percentage point to the lowest level in almost two years.
After a half-percentage-point cut in September, the central bank continued its attack against the prospect of more economic damage from a severe housing correction that has put financial markets in turmoil, largely because of a surfeit of subprime mortgages to marginally qualified borrowers.
It was a Halloween treat for financial markets, which moved strongly upward at the end of the day, with the Dow Jones industrial average climbing 137.54 points.
The Fed gave Wall Street just what it had expected. And the move also will help many Americans with adjustable-rate mortgages get a slightly better deal when their rates are reset in coming months.
The Fed reduced its benchmark federal funds rate, the rate that banks charge each other for borrowing, from 4.75 to 4.5 percent, meaning that short-term interest rates are now three-quarters of 1 percent lower than they were before its September meeting. In coming months, these cuts could stimulate the economy.
But with the move, Chairman Ben S. Bernanke's central bank also indicated that a pause in rate-cutting is likely at its meeting next month.
This signal came in two ways. First, it said that inflation risks now are about the same as recession risks, a sign that it wants to keep its eye on rising prices with oil at more than $90 a barrel. And, Thomas Hoenig, president of the Kansas City Federal Reserve Bank, dissented, a rare move on monetary policy decisions.
To Diane Swonk, an economist at Chicago's Mesirow Financial, the dissent "indicated the debate was fairly heated and the consensus was difficult to get," even though the vote was 9-1 in favor of a rate cut. And that could foreshadow more dissension in future meetings.
Though a government report showed yesterday that the economy moved up strongly in the third quarter, rising at an annual rate of 3.9 percent, many economists believe the fourth quarter and the first quarter of next year could bring about much slower growth because of lingering problems in the housing sector.
The Federal Open Market Committee, the Fed's policymaking arm, indicated that "it was taking a little bit of an insurance policy against a worse-case scenario," meaning a recession, said Carl Tannenbaum, chief economist at Chicago's LaSalle Bank.
