Posted at 9:25 a.m., Wednesday, April 18, 2001

Fed cuts rates, market soars

Associated Press Writer

WASHINGTON — The Federal Reserve, demonstrating it still has the capacity to surprise, cut a key interest rate by one-half percentage point today. Stocks immediately soared.

The rate cut was the fourth this year and the second outside a regularly scheduled Fed meeting. It took investors by surprise because Wall Street had given up hope that the central bank would cut rates before its next regularly scheduled meeting in May.

By midafternoon the Dow Jones industrial average was up 413 points and the Nasdaq had gained 186 points, topping the 2,000 level for the first time since March 15.

The Fed cut its target for the federal funds rate — the interest that banks charge each other on overnight loans — to 4.5 percent.

The Fed's action was quickly followed by announcements from Bank of America, Bank One and Wells Fargo of half-point cuts in the prime lending rate, to 7.50 percent. Other commercial banks were expected to follow suit.

The decision by the Fed's chief policy-making group, the Federal Open Market Committee, came during an emergency conference call.

"The Fed evidently has decided that the risk of an economic downturn had increased; therefore, they decided to take out an extra insurance policy to make sure that the economy does not slide into a recession," said Sung Won Sohn, chief economist for Wells Fargo.

"They sprung an element of surprise. What the market needed was a positive shock," he added.

The Fed cited a number of reasons for its action, including sluggish business investment, eroding corporate profits, economic turmoil overseas and a slide in the stock market, which could make business people and consumers fell less wealthy and less inclined to spend and invest. Consumer and business investment has been a main engine of economic growth in the past.

Taken together, this climate "threatens to keep the pace of economic activity unacceptably weak," the Fed said in a statement.

In the past, Fed Chairman Alan Greenspan has said one of the biggest factors affecting whether or not the economy slides into a full-blown downturn is whether consumer confidence holds up during the slowdown.

The Fed's previous cuts this year totaled 1.5 percentage points.

The Fed on today also cut its mostly symbolic discount rate by a half point to 4 percent. The discount rate is the interest that the Fed charges to make direct loans to banks.

"Capital investment has continued to soften and the persistent erosion in current and expected profitability in combination with rising uncertainty about the business outlook seems poised to dampen capital spending going forward," the Fed said in its statement.

The economy grew at an annual rate of just 1 percent in the final three months of 2000, the weakest performance in more than five years. Many economists believe the economy continued to lose altitude in the recently ended first quarter. Some analysts project that economic growth stalled during the January-March quarter and others say it may actually have slipped into reverse.

Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, welcomed the Fed's latest rate cut. "Aggressive action is needed to keep the economy above water. It's a lot easier to prevent a drowning than it is to rescue the drowned," he said.

"Lower interest rates can do more in the way of an immediate economic stimulus than anything Congress can do," he added. President Bush and Congress are working on ways to speed up tax relief to help give a lift to the economy.

The Federal Open Market Committee, which includes Greenspan, Fed governors and five of the 12 presidents of the Federal Reserve banks, held the emergency conference call at 8:30 a.m., Fed officials said.

The Fed's next scheduled meeting is May 15.

In the part of today's statement that reflects possible future action, the central bank maintained its position that the biggest threat to the economy is recession, not inflation.

"The committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," the Fed said.

The Fed said its action followed a review of the economy's prospects in light of data that became available since its last meeting March 20.