Posted at 11:24 a.m., Monday, December 10, 2001

Fed may reduce interest rate again

By Brendan Murray
Bloomberg News Service

WASHINGTON — The first U.S. recession in a decade may lead Federal Reserve policy makers to reduce the benchmark U.S. interest-rate target to 1.75 percent tomorrow, in an effort to boost confidence in the economy and restore growth.

Prompted by the highest unemployment rate in more than six years and continued weakness in manufacturing, Fed Chairman Alan Greenspan and his fellow central bankers will lower the target rate on overnight loans between banks a quarter percentage point, according to 43 of 57 analysts surveyed by Bloomberg News.

Rising stock prices and some early signs of recovery won't be enough to convince them otherwise, economists said.

"I don't think we'll have any dissents," said Nancy Roman, an analyst at the G7 Group Inc. in Washington. "A single piece of positive data that excites the market is really not going to be sufficient to shift their world view."

Rates on mortgages, automobile loans, personal loans, and business loans tend to fall in concert with the overnight rate, which should stimulate additional borrowing and spending.

Fed policy makers have cut rates 10 times already this year — at each of their seven scheduled meetings and during three impromptu conference calls. Three of the reductions occurred after the Sept. 11 terrorist attacks in New York and Washington.

The rate already is at its lowest level since the Kennedy administration, down from 6.5 percent at the beginning of the year. The last time it was as low as 1.75 percent was July 1961.

The Open Market Committee will meet in Washington tomorrow at 9 a.m. (4 a.m. Hawai'i time). A decision should be announced around 2:15 p.m. (or 9:15 a.m. Hawai'i time).

The U.S. unemployment rate rose to 5.7 percent in November, highest in more than six years, and payrolls fell by a greater-than-expected 331,000.

"There were some fringe opinions that the Fed would be able to go neutral at this meeting," said Carl Tannenbaum, chief U.S. economist for ABN Amro North America Inc. After Friday's jobs report, "that's clearly off the table."

Lower rates have boosted auto and home sales. The rate on a 30-year fixed mortgage has averaged 6.96 percent this year, down from 8.05 percent a year earlier.

"We've witnessed one of the most aggressive easing campaigns in Fed history," said Tom Schlesinger, executive director of the Financial Markets Center in Roanoke, Va.