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The Fed's Race Against Recession

It has cut interest rates sharply, but banks and other lenders aren't playing along. And the dip in January payrolls suggests growing weakness in the service sector

Going into the last week in January, economy watchers were expecting a blitz of reports to shed some light on the overarching question of the day: Are we in a recession? Fresh data on everything from housing and manufacturing to the labor markets and gross domestic product failed to answer the question definitively, but they tended to lean more toward the downside than the upside. What the latest indicators do say clearly is that U.S. economic growth essentially ground to a halt in the fourth quarter of last year, and it appears to be no better than dead in the water in the first quarter.

Which way the economy goes from here, either up or down, will most likely be decided by the severity of the credit squeeze that began last year, and the news from that front is not good. The Federal Reserve has cut interest rates aggressively in an effort to offset the tightening of financial conditions caused by less available credit. But the cost of credit is not the biggest issue. Lenders are increasingly unwilling to provide loans because they perceive greater risk and uncertainty in doing so.