Economy much weaker than expected

Gross domestic product slowed to a 0.6% growth rate in the fourth quarter, raising both recession fears and hope for another deep Fed cut.

The economy grew at a much slower pace in the last three months of the year, according to a government report Wednesday that came in well below Wall Street expectations.

The report raised fears of a recession and hopes for another significant interest rate cut by the Federal Reserve.

The gross domestic product, the broadest measure of the nation's economic activity, grew at an annual rate of 0.6%, adjusted for inflation, in the fourth quarter, according to the Commerce Department, down from 4.9% in the final reading of growth in the third quarter. Economists surveyed by Briefing.com had forecast GDP would slow to a 1.2%.

The report comes amid rising concern that the U.S. economy is falling into a recession, with some economists arguing the downturn started in the final month of 2007.

It also comes as the Fed concludes a two-day meeting to consider whether or not to cut interest rates once again in order to spur the economy and ward off a recession. The central bank has already lowered rates by 1.75 percentage points since September, including an emergency 0.75 percentage point cut, also known as a 75 basis point cut, a week ago.

Investors are betting that the Fed announces at least another quarter percentage point cut, or 25 basis points, when it announces its decision at 2:15 p.m. ET, with those buying fed funds futures on the Chicago Board of Trade were pricing in a 70% chance of a half-point, or 50 basis point cut, ahead of the GDP report.

But while the weakness in the report suggested that the Fed might move aggressively to cut rates, the inflation readings in the report could be a concern for the central bank. The so-called price deflator, which measures prices overall, rose at a 2.6% annual rate, up from only a 1% rise in the third quarter but in line with forecasts.

Perhaps of greater concern is that the so-called core PCE deflator - a more closely watched inflation reading that measures prices that individuals pay excluding volatile food and energy prices - rose 2.7%, up from a 2.0% reading in the third quarter and nearly double the 1.4% rise in the second quarter.

The Fed is generally seen as wanting to see that reading rise between 1% and 2%, meaning the latest reading is far from its so-called comfort zone. To top of page