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WASHINGTON - The U.S. economic slump took center stage Wednesday as new data revealed an economy teetering on recession, the Federal Reserve shaved another whopping half-point off interest rates and the Senate began working on a stimulus plan of its own to jolt consumer and business spending.
The Federal Reserve reduced its benchmark federal funds rate - the overnight rate that banks charge each other - to 3 percent on Wednesday afternoon. Commercial banks mirrored the Fed's move, lowering their prime rate - what they charge their best borrowers - to 6 percent. The Fed also made a half-point cut to the rate it charges banks for emergency borrowing.
In just eight days, the central bank has chopped its benchmark rate by 1.25 percentage points, emphasizing its concerns that the U.S. economy is going into a near stall.
This view was underscored by Commerce Department data released hours before the rate cut, which showed that the U.S. economy grew by a subpar 2.2 percent in 2007 and a tepid 0.6 percent in the last quarter of the year.
That number was roughly half the growth rate that most mainstream economists had anticipated. It confirmed that the U.S. economy had little tailwind behind it going into what's been a volatile start to 2008.
''Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,'' the Fed said its statement.
''Moreover, recent information indicates a deepening of the housing contraction, as well as some softening in labor markets," the Fed said.
The statement left open the possibility of more rate reductions in the months ahead.
Stocks rallied after the announcement, but by the close of trading the Dow Jones Industrial Average finished down 37.47 points, while the S&P 500 was off 6.49 points. The tech-heavy Nasdaq closed down 9.06 points.
When the Fed began lowering rates last September, its benchmark rate was 5.25 percent and the prime rate was 8.25 percent.
Usually, lower rates make it cheaper to take out a car loan, pay off credit card debt or buy inventory for a small business. But turbulent credit markets and a deep slump in the housing sector may mute some of the benefits of all the rate reductions, whose effects in any case won't be felt across the broader economy for months. Banks and other lenders have become reluctant to lend to anyone but borrowers with strong credit histories.
Commerce Department economic-growth data released Wednesday illustrated how much housing is hurting the broader economy. Investment in residential housing fell by the largest quarterly amount since 1981, and that's dampening the Fed's efforts to jumpstart the economy.
Speaking in Washington to a real estate group Wednesday, Treasury Secretary Henry Paulson warned that a housing rebound appears unlikely anytime soon.
President Bush and Congress are rushing to put together an economic stimulus plan, hoping that the combination of tax rebates for consumers and tax breaks for businesses will spur consumer spending, which drives two-thirds of U.S. economic activity.
The $150 billion stimulus measure passed the House of Representatives on Tuesday, but the Senate began modifying the plan Wednesday, risking conflict with the House and a potential presidential veto.
Bush used a visit to a helicopter-manufacturing plant in Torrance, Calif., to warn senators that ''if you're truly interested in dealing with the slowdown in the economy, the Senate ought to accept the House package, pass it and get it to my desk as soon as possible.''