The Federal Reserve cut US interest rates a half-percentage point on Tuesday to the lowest level in 40 years as it sought to brake the economy's slide into probable recession in the wake of the Sept. 11 attacks.
The Fed chopped its key federal funds rate for overnight bank loans for a 10th time this year to 2 percent -- a level not seen since during the Kennedy administration in 1961. The central bank also lowered its more symbolic discount rate by a half-point to 1.5 percent.
Financial markets responded enthusiastically to the US central bank's clear determination to do whatever it could to pump vigor into an economy left reeling after the shattering attacks against the World Trade Center and the Pentagon.
Stocks rallied as interest rates sank below the level of increases in consumer prices, cutting the real cost of borrowing to essentially below zero, and banks reduced prime lending rates for their best corporate customers to 5 percent from 5.5 percent.
That means lower prices for auto, home equity and some credit card loans that are tied to the prime rate. The bluechip Dow Jones Industrial Average added 150.09 points to close at 9,591.12 while the NASDAQ Composite Index gained 41.43 points and ended at 1,835.08.
Warning of global slowdown
The Fed highlighted the risk not only of a worsening US downturn but also a possible slide in global activity. The cost of increased security was putting pressure on productivity and worry was weighing on consumer demand, it added.
"Heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity," the Fed said. Down the road, policymakers said the economy should bounce back once some of the clouds from the attacks and from an anthrax scare lift enough for consumers to recover confidence and resume spending.
Economist Bob Brusca of Eco-best Consulting in New York said the Fed in its statement might have been trying to encourage its European counterpart to do more to rouse activity there by cutting rates.
"It looks like there is a subtle call here to try to get economies overseas to jump in and do a little bit more perhaps on the interest-rate front," Brusca commented.
The European Central Bank meets today amid signs inflation eased in the 12-nation euro zone last month.
Analysts praised the Fed's bold campaign -- which has included three half-percentage point cuts since the attacks -- and said the economy was getting a powerful dose of monetary and fiscal medicine that should spur a recovery next year.
"All the cuts this year have been necessary to try to stimulate a very weak economy," said economist Mark Zandi of Economy.com in West Chester, Pennsylvania.
But he said that the end may be nigh for the easing push.
"But I think this may be it if Congress puts a stimulus package in place by next month ... If we're not at the very end of rate-cutting, we're very close," Zandi said.
All but one of 24 leading Wall Street bond dealers surveyed expected a quarter-point rate reduction in December. But only half expected another similar-sized cut next year, a sign dealers see the rate-cutting cycle winding down.
The Fed suggested it remained optimistic about the future.
"Although the necessary reallocation of resources to enhance security may restrain advances in productivity for a time, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate," it said.
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