Fed hints more rate cuts likely

Bloomberg News Service

WASHINGTON — Not only did Federal Reserve policy makers lower the benchmark U.S. interest rate a quarter percentage point today, the seventh cut this year, but they also signaled another reduction is possible in coming months, possibly at the next policy meeting on Oct. 2.

Fed Chairman Alan Greenspan suggested there is room to lower interest rates further. Associated Press

"Household demand has been sustained, but business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the U.S. economy," the Fed said in a four- paragraph statement accompanying its decision.

The Fed reduced the target rate for overnight loans between banks to 3.5 percent, the lowest since April 1994. The Bank of Hawai'i and First Hawaiian Bank immediately lowered their base lending rates to 6.50 percent from 6.75 percent.

Since the first of the year, the Fed has reduced its target rate 3 percentage points to keep the slowdown from worsening.

That's the most aggressive pace of interest-rate reductions by the Fed since 1982.

Greenspan told Congress last month that rate reductions so far hadn't yet proved sufficient to pull the economy back onto its feet. "We aren't free of the risk that economic weakness will be greater than currently anticipated, and require further policy response," he said.

The biggest problem facing the economy has been a collapse in business investment that's forced manufacturers to reduce inventories by cutting production. The process has been difficult for telecommunications, computer and software companies. Business spending on equipment and software has declined for three straight quarters, the first time that's happened since 1982-1983.

So far, the economy has shown few signs of reacting to lower rates. The Conference Board's consumer confidence index declined to 116.5 in July from a six-month high of 118.9 in June. The index has ranged between 109 and 119 this year, below the average reading of 127 for the previous five years.

Corporate profits fell 16.8 percent in the second quarter, the worst performance since the third quarter of 1991, based on reports from 479 companies in the Standard & Poor's 500 Index, according to Thomson Financial/First Call.

And manufacturing has contracted for 12 straight months, the longest stretch of weakness since the 1990-91 recession, according to the National Association of Purchasing Management.

While today's Fed statement suggested policy makers aren't ruling out further rate reductions, analysts are beginning to doubt there will be additional cuts unless business investment slumps further or consumers curb their spending.

Of the 25 banks and securities firms that trade directly with the Fed, 13 say today's rate reduction will be the last this year and 12 expect at least one more.