Fed cuts interest rates half a point
| • | Hawai'i banks lower prime lending rates |
By Martin Crutsinger
Associated Press Economics Writer
WASHINGTON — The Federal Reserve, still trying to resuscitate the weak economy, cut interest rates a half point further today, pushing borrowing costs for millions of Americans to the lowest level in seven years.
Associated Press
It was the Fed's fifth half-point reduction this year, extending a rapid-fire string of moves in its most aggressive easing campaign under Chairman Alan Greenspan.
TV monitors on the New York Stock Exchange floor deliver the news of the Fed's fifth cut in interest rates this year. The news failed to excite investors, and stocks closed virtually unchanged. See story.
Since the first of the year, the central bank has pushed its target for the federal funds rate, the interest that banks charge each other, from 6.5 percent down to 4 percent.
Economists said the Fed clearly signaled in a brief statement that it was prepared to cut rates even further. Many predicted another reduction at the next meeting on June 26-27.
"The Fed is worried that we are not out of the woods yet in terms of avoiding a recession," said David Wyss, chief economist at Standard & Poor's in New York. "Greenspan does not want another recession on his watch."
The nation's commercial banks quickly followed the Fed's mid-afternoon announcement by cutting their prime lending rate, the benchmark for millions of short-term consumer and business loans, from 7.5 percent to 7 percent, the lowest since April 1994.
In contrast to the rapid pace of the Fed's rate cuts this year, which have lowered interest rates by 2 1/2 percentage points in 4 1/2 months, it took the agency 14 months to accomplish the same amount of credit easing during the 1990-91 recession, the nation's only downturn since Greenspan took over as Federal Reserve chief in 1987.
"It is clear that the Fed is going to do everything it can to make sure the economy does not slip any further," said Martin Regalia, chief economist for the U.S. Chamber of Commerce.
Wall Street, where the rate cut had been widely anticipated, took yesterday's announcement in stride.
The Dow Jones industrial average finished the day down 4 points at 10,873. The muted reaction was in sharp contrast to the 399-point rally triggered by the Fed's last rate move on April 18, which caught investors by surprise.
In its statement yesterday, Federal Reserve policy-makers expressed continued worries about sagging corporate profits and business plans to slash spending on new plants and equipment, a driving force in the current expansion.
"The erosion in current and prospective profitability, in combination with considerable uncertainty about the business outlook, seems likely to hold down capital spending going forward," the Federal Reserve said in its statement.
Significantly, according to analysts, the Fed did not express worries that the recent jump in energy prices could lead to a wider breakout of inflation pressures, something that would restrain its ability to lower rates.
"With pressures on labor and product markets easing, inflation is expected to remain contained," the Fed said. The policy-makers said they remained convinced that the balance of risks remained weighted toward "economic weakness."
While retail sales posted a surprisingly strong rebound in April, after two monthly declines, the current fear is that the rising unemployment rate could shake Americans' confidence and cause a big cutback in consumer spending, which accounts for two-thirds of economic activity.
Associated Press
The jobless rate jumped to 4.5 percent in April as businesses slashed payrolls by the largest amount in a decade, reflecting continued big layoffs in manufacturing.
Fed Chairman Alan Greenspan is moving aggressively to try to avoid a recession.
Jerry Jasinowski, the president of the National Association of Manufacturers, said the Fed's latest rate cut should jump-start growth by late this year.
He urged Congress to do its part to stimulate the economy by passing President Bush's tax cut program.
Most forecasters said they believe the country will be able to avoid a recession, but many also said a significant rebound is not likely until the final quarter of this year.
While some analysts predicted that the Fed's funds rate would be cut by another half-point to 3.5 percent at the June meeting, other analysts said the central bank may choose to revert back to its more normal quarter-point cuts at both the June and August meetings.
"The days of both (half-point) cuts and inter-meeting moves are probably over at this point," said Bruce Steinberg, who predicted the Fed's actions would set the stage for strong rebound in the October-December quarter of this year and a return to solid growth in 2002.
