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Fed Slices Rates to Avoid A Downturn
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The move came a few hours after the Commerce Department reported that the economy grew faster than expected in the third quarter, with gross domestic product (GDP) climbing at a 3.9 percent annual pace. For most of the three months that ended Sept. 30, the impact of the late summer crisis in housing and credit markets had not had time to affect financial decisions.
The increase in GDP, a broad measure of the value of goods and services produced within U.S. borders, was driven by a 16.2 percent rise in exports and 3 percent gains in consumer spending. Those were enough to make up for a steep, 20.1 percent drop in investment in housing.
The big question ahead -- and a major worry that led the Fed to cut rates -- is whether consumers will keep spending money readily as the housing market gets worse.
"Housing has been going down dramatically, but the rest of the economy has been holding up remarkably well," said Nigel Gault, a U.S. economist with consulting firm Global Insight. "The worry is that while things have been very good, we haven't yet seen what the fallout is going to be from the dramatic tightening in financial conditions."
Unlike the unanimity displayed at recent Fed meetings, yesterday there was dissent. Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, voted to leave the federal funds rate unchanged, alone among the committee's 10 voting members. The statement, as is custom, did not elaborate on Hoenig's rationale.
Investors will be looking for more evidence the economy is weathering recent turmoil, which began in the market for low-credit quality mortgage loans and has spread broadly, when the Labor Department reports on October labor market conditions tomorrow.
In a preview of that release, payroll processing firm ADP said that overall national private payrolls appear to have risen by a healthy 106,000 jobs last month.
The Dow Jones industrial average closed up 137.54 at 13,930.01. The broader Standard and Poor's 500-stock was up 1.2 percent, or 18.36, at 1549.38. The Nasdaq Stock Market rose 42.41, 1.5 percent, to 2859.12.
