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Thu, Aug 23, 2001 - Page 21 News List

US Fed cuts rates by a quarter point

ECONOMY The Federal Reserve lowered its funds rate for the seventh time this year in an effort to aid the flagging American economy and encourage share investors

AP , WASHINGTON

A trader at the Chicago Merchantile Exchange signals shortly after the Federal Reserve announced a quarter-point cut in its interest rate.

PHOTO: AP

The Federal Reserve, still trying to keep the US economy out of a recession, cut a key interest rate Tuesday for the seventh time this year, lowering the federal funds rate by a quarter-point to 3.50 percent.

The reduction pushed the funds rate, the interest that banks charge on overnight loans, to its lowest level in more than seven years.

In response, Bank of America and Bank One cut their prime lending rate, the benchmark for consumer and business loans, to 6.5 percent, also the lowest level in seven years. Other banks were expected to follow suit.

On Wall Street, stock prices dropped after the announcement, investors having anticipated the Fed's action. Within 20 minutes of the announcement, the Dow Jones industrial average had lost a 45-point gain and another 20 points. The NASDAQ index fell 7 points.

With the latest reduction, the Fed has cut rates by 3 percentage points since the beginning of this year, including five straight half-point rate reductions, which represented the Fed's fastest credit easing in nearly two decades.

The effort is aimed at jump-starting the US economy, which has been lackluster for a year and slipped close to recession territory in the spring.

In explaining its latest rate move, the Fed said in a statement: "Household demand has been sustained, but business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the US economy."

The quarter-point move had been expected. Some analysts had said the central bank might opt for a larger half-point move in an effort to deliver a surprise to Wall Street investors, who had already factored in a quarter-point cut.

Signaling possible future moves, the Fed said the balance of risks going forward remains "weighted mainly toward conditions that may generate economic weakness in the foreseeable future."

Profit takers

* On Wall Street, stock prices dropped after the announcement, investors having anticipated the Fed's action.

* Within 20 minutes of the announcement, the Dow Jones industrial average had given up a 45-point gain

* The NASDAQ index fell 7 points.


Many analysts said the Fed was leaving the door open for another rate cut at its next meeting on Oct. 2, but they said that would likely be the last move in this easing cycle. They said this view explained why investors registered disappointment with the Fed's latest cut.

"There is a sense in the stock market that the Fed is getting near the end of its credit easing," said David Jones, chief economist at Aubrey Lanston & Co in New York.

The Bush administration is counting on lower interest rates plus the impact of nearly US$40 billion in tax rebate money this year to boost consumer demand and provide greater strength in the second half of the year.

Economists point to encouraging signs that an upturn may be imminent, including a report Monday that the Index of Leading Economic Indicators rose by 0.3 percent in July, the fourth consecutive monthly gain.

The economy barely grew in the spring, managing only a 0.7 percent rate of increase in the gross domestic product, the poorest performance in eight years. Even that rate is likely to be lowered when the government revises the figure later this month.

Top forecasters surveyed by Blue Chip Economic Indicators said they were looking for a slight rebound to growth rates of 1.7 percent in the July-September quarter and 2.8 percent in the final three months of this year.

In addition to the change in the federal funds rate, the Fed also lowered its largely symbolic discount rate by a quarter point.

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