Even With Fed's Radical Rate Cut, Fears Persist of an Extended Recession

The U.S. interest rate is now the lowest among developed economies.

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The Federal Reserve slashed its key interest rate to near zero yesterday in an attempt to pull the economy out of recession, a move that could help consumers looking to make big purchases. And it said that it would print more money to unplug credit markets. Despite the government’s increasingly drastic measures, however, analysts warn that the economy isn't going to look up anytime soon.

While many had predicted that the Fed would cut the interest rate to 0.5 percent yesterday, it went even further, lowering it to 0.25 percent. The former level—1 percent—was already the lowest rate in 50 years. The current level is the lowest interest rate among developed countries.

The immediate effect of the announcement was a stock market rally. The Dow jumped 360 points on Tuesday. However, it is down in early trading today, and the dollar tumbled against other currencies. In other economic news, the Commerce Department reported today that the trade account deficit, which comes from the money that the United States is borrowing from foreigners, fell more in the third quarter than expected.

There’s even a silver lining in yesterday’s news that the consumer price index dropped more steeply last month than at any time since 1933, even though the numbers fueled fears of deflation. If the cost of food, clothing, and cars is falling, then so is the cost of living for Americans struggling to balance their budgets.

Still, analysts caution not to expect the economy to get better soon. In fact, they say, it will get worse before it improves. Americans seem to agree. In one recent poll, nearly two thirds said that they’ve been hurt by the downturn, while 66 percent said they worry about keeping their standard of living.

Almost 2 in 10 say that either they or a member of their household has lost a job in the past several months. That jibes with the recent news that the unemployment rate increased to 6.7 percent in November as employers cut a record 533,000 jobs.

Meanwhile, the Paris-based Organization for Economic Cooperation and Development reported recently that U.S. economic weakness will continue into 2010, with foreclosures rising and house prices falling further.