Updated at 9:34 a.m., Tuesday, December 11, 2001
Fed cuts interest rate for 11th time this year
Associated Press
WASHINGTON — The Federal Reserve cut a key interest rate today for the 11th time this year in an attempt to keep the economy from sinking further into recession. The quarter-point reduction was less than the half-point cuts the central bank had been making since the Sept. 11 attacks.
The Fed's cut is aimed at bolstering the economy, which has been in recession since March and was dealt another severe blow by the terrorist attacks. In their aftermath, consumer confidence has plunged, layoffs have rocketed and unemployment soared, hitting 5.7 percent in November.
Economists hope that lowering borrowing costs will persuade consumers and businesses to spend and invest.
Today after their last scheduled meeting of the year, Federal Reserve Chairman Alan Greenspan and his colleagues announced they were cutting the target for the federal funds rates, the interest banks charge each other on overnight loans, to 1.75 percent, the lowest since July 1961.
The Fed, in explaining its rate cut said: "To be sure weakness in demand shows signs of abating, but those signs are preliminary and tentative."
In response, commercial banks were expected to reduce their prime lending rates, the benchmark for millions of consumer and business loans, by a similar quarter-point to 4.75 percent, the lowest since November 1965.
Today's quarter-point cut in the federal funds rate marked the fourth reduction since the terror attacks, but the three previous cuts were each by a bigger half-point. The last rate cut came Nov. 6.
Financial markets had expected the smaller quarter-point cut, believing the central bank would make the switch in an effort to signal that the string of rate cuts may be drawing to a close.
However, in the part of the statement that reflects possible future action, policy-makers left the door open to further rate cuts should the recession show signs of lingering.
The Fed also decided to cut its discount rate, the interest that the Fed charges to make direct loans to banks, by a quarter-point to 1.25 percent, the lowest level on record.
The Fed's credit easing, which started Jan. 3, has reduced the federal funds rate by 4.75 percentage points in the past year. That is the most aggressive string of rate reductions in a 12-month period since 1981, when the central bank was trying to pull the country out of the worst recession since the Great Depression.
The Fed's actions this year were not enough to prevent the United States from falling into its first recession in a decade. The National Bureau of Economic Research recently declared that the recession began in March. The group said that without the terror attacks, the slowdown might not have been bad enough to qualify as a full-blown downturn.
In the Fed's brief statement, Greenspan and his colleagues said that "economic activity remains soft, with underlying inflation likely to edge lower from relatively modest levels."
One of the reasons the Fed has had the room to cut rates so aggressively is because inflation has remained under control.
The Bush administration, meanwhile, is pushing Congress to pass this year a package of tax cuts and increased government spending to revive the economy. The economic stimulus package, however, has been hung up in partisan wrangling.
Treasury Secretary Paul O'Neill was dispatched to Capitol Hill today with a new offer on jobless aid that goes well beyond the limited grants to states that President Bush initially proposed, White House officials said.
