Fed cuts key interest rate by 1/4 point

By Mark Felsenthal

WASHINGTON, April 30 (Reuters) - The Federal Reserve lowered a key U.S. interest rate by a modest quarter percentage point on Wednesday in what may be the last of a series of cuts aimed at aiding an economy hit hard by a housing slump and credit market turmoil.

The Fed's action takes the bellwether federal funds rate to 2 percent, the lowest since December 2004. It was the seventh reduction in a campaign that has brought rates down by 3.25 percentage points since mid-September.

President George W. Bush on Tuesday said the U.S. economy faced a "tough time," a point underscored on Wednesday by a report that showed U.S. gross domestic product expanded at a slim 0.6 percent annual rate in the first quarter.

While the growth rate was a bit stronger than economists had expected, it reflected a buildup in inventories that may weigh on the economy in coming months.

Other details in the report were decidedly weak.

Consumer spending, which accounts for two-thirds of U.S. output, grew at the slowest pace since 2001, business investment fell and homebuilding continued to nosedive, recording the biggest drop in 26 years.

Fed Chairman Ben Bernanke told Congress on April 2 that "recession is possible," adding that the Fed believed there might be a "slight contraction" in the economy in the first six months of the year.

At the same time, with gasoline prices heading toward $4 dollars a gallon and strong global demand pushing up food prices, some Fed officials have worried that a desire to bolster the economy could divert the central bank's attention from inflation pressures.