Posted at 9:30 a.m., Wednesday, June 27, 2001

Fed cuts interest rate by quarter-point

Associated Press

WASHINGTON — The Federal Reserve today cut a key interest rate for a sixth time this year. But the reduction was only a quarter-point, instead of the half-point moves taken since January.

In a brief statement, the Fed provided no explanation why it switched to a smaller cut, other than citing that "continuing favorable trends bolster long-term prospects for productivity growth and the economy."

Many economists had expected the smaller reduction, saying some Fed officials were growing concerned that its most aggressive credit-easing campaign in nearly two decades was laying the groundwork for higher inflation next year.

The Fed cut its target for the federal funds rate, the interest banks charge each other on overnight loans to 3.75 percent, the lowest since April 18, 1994, when the funds rate also stood at 3.75 percent.

Almost immediately, commercial banks, led by Bank of America and Bank One, began cutting their prime lending rates, from 7.0 to 6.75 percent, lowest since 1994. The prime is the benchmark for millions of consumer and business loans.

Economists widely expected the Fed policy-makers to administer another bracing tonic to the economy in the form of a sixth interest rate cut. But they were divided over what they believed to be the right dosage: another half-point or a quarter-point reduction.

The decision came after closed-door two-day meeting of the Fed's chief policy-making group, the Federal Open Market Committee. The panel is composed of Fed Chairman Alan Greenspan, Fed governors and presidents of five of the 12 Federal Reserve banks.