The Federal Reserve boldly slashed interest rates on Wednesday, attempting to stave off a recession after the housing slump and tighter credit almost sank the economy in the fourth quarter.
The half-point 18eduction in the fed funds target rate, to 3%, came a week after the Fed unexpectedly cut borrowing costs by 75 basis points as stocks sold off worldwide amid U.S. recession fears.
"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," the central bank said in Wednesday's post-meeting statement.
Policymakers also cited "a deepening of the housing contraction as well as some softening in labor markets."
The economy grew at an annual rate of just 0.6% in the fourth quarter, well below the robust 4.9% gain in the previous quarter and the weakest performance in five years, the Commerce Department said Wednesday. Wall Street had expected a 1.2% rise.
For all of 2007, the economy expanded 2.2% -- the slowest pace in five years.
Stocks rallied after the expected Fed rate move. But the major averages turned south on renewed concerns about bond insurers.
The 10-year Treasury yield rose 1 basis point 15 3.69%, off its intraday high but still rebounding from last week's four-year low.
The Fed said "downside risks to growth remain," suggesting it could cut rates further.
The GDP report's core PCE price index, the Fed's preferred inflation gauge, rose at a 2.7% annual rate in the fourth quarter, the biggest in more than a year.
But policymakers said they expected inflation to "moderate."
Economists applauded the Fed's move.
"It's all positive. The risk of not cutting enough is a U.S. economy that fails," said Todd Schoenberger, executive director of brokerage at USAA.
But some feared that policymakers may be too late.
"The good news is that the patient is getting the right medication, but the bad news is that the patient is sick already and won't get better for a while," said Christian Menegatti, lead analyst at RGE Monitor, an economics Web site.
It takes six months or more for rate cuts to aid the economy, analysts say.
The Fed also cut its discount rate -- the rate it charges banks for loans -- by a half-point, to 3.5%.
The discount rate is seldom used, so the central bank has been relying on its new "TAF" auctions to get cash to the banks that need it.
Dallas Fed chief Richard Fisher was the only policymaker to oppose cutting the fed funds rate. He favored no change despite signs that the economy is slowing sharply.
Home construction fell at a 23.9% annual rate -- the most since 1981 -- subtracting 1.2 percentage points from fourth-quarter GDP growth.
Companies also pared stockpiles, cutting 1.3 points from growth.
But that could be good news for future growth, economists said. Tight inventories mean factories might have to ramp up output, especially if rate cuts or a proposed economic stimulus package fuel spending.
"Stimulus, be it from the Fed or elsewhere, can be particularly potent due to the inventory drawdown," said Lakshman Achuthan, managing director of the Economic Cycle Research Institute.
Consumer spending rose at a less-than-expected 2% pace. Other data have showed retail sales falling in December.
Business investment rose 7.5%, below the third quarter's 9.3% rate but better than many forecasts.
Strong exports again helped narrow the trade deficit, adding 0.55 percentage point 15 GDP.
Separately, private-sector firms added 130,000 workers in January, much larger than December's 37,000 increase, according to ADP.
That's double Wall Street's forecast for Friday's payrolls report, which includes government jobs.
ADP has an uneven track record of forecasting the payrolls data, but it jibes with declining jobless claims.
"If employment at least is solid, it lays the groundwork for continued consumer spending," said Bruce McCain, head of investment strategy at Key Private Bank.
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