(Agencies)
Updated: 2007-11-01 06:40

So far, the economy has shown amazing resilience to the housing and credit strains.

The economy grew at a brisk 3.9 percent pace in the summer, the fastest in 1 1/2 years, the government reported Wednesday. The impressive performance came even as the housing market sank deeper into the doldrums.

Fed policymakers, in their statement, said economy turned in a "solid" performance in the third quarter. They also said that "strains from financial markets have eased somewhat on balance."

Even so, economic growth is expected to slow to a pace of around 2 percent or less in the current October-to-December period as the toll of the deteriorating housing market catches up with consumers and chills their spending.

As another bolstering move, the Fed also sliced its lending rate to banks by one-quarter percentage point. That was the third cut to that rate since mid August.

Complicating the Fed's job to keep the economy and inflation on an even keel is surging oil prices. They soared to a record near $95 a barrel on Wednesday.

The Fed said that "recent increases in energy and commodity prices, among other factors, have put renewed upward pressure on inflation." The Fed said that while some inflation barometers that exclude energy and food prices have improved modestly this year, some inflation risks remain. They pledged to "monitor inflation developments carefully."

If rising oil prices boost the prices of many other goods and services in the economy, then inflation could take off. At the same time, high energy prices could crimp consumer and business spending, putting another damper on overall economic activity.

Although the economy performed well in the third quarter, the housing slump deepened. It shaved more than a full percentage point off economic growth.

The meltdown in the mortgage market has made it harder for people to obtain financing to buy homes. That's aggravating problems in the housing market and leading to a mounting pileup of unsold homes. The housing slump is expected to drag on well into next year and foreclosures are expected to rise.

The Fed in September lowered its key interest rate for the first time in more than four years. It was seen as a pre-emptive strike to ensure housing and credit problems don't sink the economy. The Fed's aggressive action at that time prompted a rally on Wall Street, propelling the Dow Jones industrials up by nearly 336 points. It was the Dow's biggest one-day point jump in nearly five years.

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