Fed Cuts Interest Rates Again

But not all economists see the economy heading into a downward spiral. Benjamin Friedman, an economics professor at Harvard University, said it's too early to talk about recession, but he acknowledged an interest rate cut is necessary to heat up a cooling economic boom. "I think there's more to be done in the way of lowering interest so as to stimulate activity, making it easier for individuals, businesses and homeowners to borrow."

Substantial Slowdown in Economy

More evidence of the slowdown came earlier today, when the government reported that the powerhouse economy slowed sharply in the closing quarter of 2000, posting the weakest growth in five and a half years as consumers clamped their purses shut and goods piled up on store shelves.

Gross domestic product, which measures the value of all goods and services produced within U.S. borders, advanced at a lackluster 1.4 percent annual rate during the October-December fourth quarter, down from 2.2 percent in the third quarter.

It was the slowest pace of GDP increase for any three-month period since a 0.8 percent rise in the second quarter of 1995 when the economy also was coping with overstocked inventories.

Friedman added recent reports about the slowing rate of job creation as yet more evidence of a slowdown. "We've had substantial layoffs and if this continues for more than another couple of months, then the unemployment rate will increase. "

Balancing Growth and Fears

This is the second big rate cut in less than a month and amounts to a full one percent drop in interest rates since Jan. 3. The Federal Reserve hasn't taken such dramatic action since December of 1991, more than nine years ago. The country was just beginning to emerge from the recession that played a key role in Bill Clinton's defeat of then-President George Bush.

Greenspan told Congress last week that the mighty U.S. economy, now in a record 10th year of expansion, had "slipped very dramatically" and that growth was "close to zero."

Although the Fed cut rates today, the impact may not be immediate, according to Rippe. "It takes six to 12 months for the full impact to be visible, but there's a psychological benefit that comes sooner." He added that businesses and consumers tend to feel more confident if they feel the Fed is doing everything possible to improve the economy.

Stuart Hoffman, an economist at PNC Financial Services Group also pointed out that "the Fed doesn't want to risk a self-fulfilling prophecy of recession, so the rate cut will be aimed at shoring up confidence in the knowledge that it takes many months for these rate reductions to impact the economy positively."

Markets saw Greenspan's words as confirmation that the Fed chief thought an aggressive cut was in order. Ahead of the news, investors were betting that a big rate cut was in the cards, as the Dow Jones Industrial Average soared 179.01 points Tuesday to close at 10,881.20 while the high tech-laden Nasdaq composite index tread water to end virtually unchanged at 2,838.35.

A brighter stock market picture, after a bout of exceptional weakness in the second half last year, is one thread of hope that a downturn might be temporary. Cheaper interest rates have also helped buoy the housing market as cheaper mortgages have kept a floor under building and sales.

ABCNEWS.com's Romy Ribitzky, ABCNEWS Radio's Bill Greenwood, Reuters and The Associated Press contributed to this report.

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