The Federal Reserve cut a key interest rate by one-quarter of a percentage point Tuesday, trying to keep the country out of recession.
The reduction in the federal funds rate to 4.25 percent marked the third rate cut in the past three months. Fed officials signaled that further cuts were possible if a severe downturn in housing and a crisis in mortgage lending get worse.
Commercial banks were expected to quickly match the latest reduction by trimming their prime lending rate, which would reduce this benchmark rate for millions of consumer and business loans to 7.25 percent.
The Fed started cutting rates in September with a bolder-than-expected half-point move and then reduced the funds rate by a quarter-point at its Oct. 31 meeting. The central bank was trying to make sure that a severe slump in housing, spreading mortgage defaults and financial market turbulence, which hit with force in August, did not derail the economy.
Fed Chairman Ben Bernanke and his colleagues began their final meeting of 2007 behind closed doors Tuesday morning. Wall Street investors traded cautiously as they awaited the announcement.
In its October announcement, the Fed indicated that its two rate cuts might well be all that would be needed to make sure the country was not pushed into a recession.
But that view has undergone a dramatic about-face in the six weeks since that time, reflecting worsening conditions in financial markets and continued sharp declines in housing as lenders tighten standards in response to rising mortgage defaults.
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