Federal Reserve policy makers lowered benchmark interest rates a half percentage point on Tuesday in the fifth such reduction this year and suggested another is possible to spark a rebound in US business investment.
Fed Chairman Alan Greenspan and his colleagues on the Open Market Committee cut the target rate for overnight loans between banks to 4 percent, the lowest in seven years. Restrained purchases of equipment, possible weakness in consumer spending and slow global growth continue "to weigh on the economy," the Fed said in announcing the decision.
The Fed's "focus remains firmly on a slumping manufacturing sector and slowing business investment," said Vincent Boberski, senior economist at Dain Rauscher Inc in Chicago. "This announcement opens the door to another half-point cut in rates." Minutes after the announcement, Bank of America Corp and Bank One Corp, the third- and fifth-largest US banks, said they would cut their prime rate by a half point to 7 percent by yesterday.
That is likely to boost the economy, which stalled late last year and has recently begun to rebound.
A rally in stocks fizzled on concerns the economy remains weak. Major stock indexes were little changed with the Dow Jones Industrial Average down 4 points and the NASDAQ Composite Index up 4 points.
The US Treasury's 10-year note fell 1/2 point, pushing up its yield 8 basis points to 5.52 percent, on concern that the Fed could go too far and cause inflation to accelerate. In its statement, the Fed dismissed those worries, saying "inflation is expected to remain contained." Since the first of the year, the Fed has reduced its target rate 2 1/2 percentage points, the most aggressive period of rate- cutting ever by the Greenspan Fed. As they have with each rate reduction this year, central bankers warned the economy faces a risk of continued weakness.
"The erosion in current and prospective profitability, in combination with considerable uncertainty about the business outlook, seems likely to hold down capital spending," the Fed said.
Recent surveys show company executives plan to invest less this year than last on new equipment of the sort that allowed companies to double their productivity gains in the last five years. Spending on equipment and software, which grew more than 13 percent a year since 1995, fell in the last two quarters, Commerce Department figures show.
"Business leaders that are buying capital equipment in general have to think there's going to be demand for their products," said Ray Bingham, chief executive of Cadence Design Systems Inc, the largest maker of software for designing computer chips. "When people are buying PCs and cell phones and investing in network infrastructure, then we'll know the demand picture has changed." Weak investment spending, "together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, continues to weigh on the economy," the central bank said on Tuesday.
The Fed's Board of Governors also voted to cut the discount rate on loans to banks from the Fed system by a half percentage point to 3.5 percent. Although few banks borrow directly from the Fed to meet their cash reserve requirements, the central bank generally keeps the discount rate within a half point of the overnight bank rate.
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