Fed cuts interest rate to 1%

• Small firms say credit not problem

By Sue Kirchhoff
USA Today

WASHINGTON — The Federal Reserve cut interest rates yesterday by a quarter-point to a 45-year low of 1 percent, saying the economy "has yet to exhibit sustainable growth."

The Fed's policy-making Open Market Committee reiterated that the risk of deflation — a widespread, sustained fall in prices — was minor but continued to outweigh the possibility that the economy would heat up too fast, sparking unwelcome inflation.

The Fed also appeared to leave the door open to further rate cuts, calling the upside and downside risks to the economy roughly equal. In a somewhat rare break from what has been a largely unanimous central bank, San Francisco Fed President Robert T. Parry voted against the move, wanting instead a bigger, half-point rate cut. The last dissenting vote was in September 2002.

"The committee continues to believe an accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, is providing important ongoing support to economic activity," the Fed said in a statement, adding: "Recent signs point to a firming in spending, markedly improved financial conditions, and labor and product markets that are stabilizing."

With inflation subdued, the Fed said, a further rate cut would provide more support for an economy that is expected "to improve over time."

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said that the Fed seemed to be saying conditions were improving slowly, but that the Fed was determined to keep rates low — or cut them again — until a stronger rebound materialized.

Shepherdson said the consensus at High Frequency, which assesses the global economy, is still that "a further ease will be rendered unnecessary by stronger data."

The economy has expanded for six consecutive quarters, though inching forward at tepid 1.9 percent annual pace in the first three months of 2003. Private economists generally expect growth to pick up in the second half of this year, and hit high gear in 2004. Among the positive factors, they cite recent tax cuts, pent-up business demand and lower energy prices.

But new data yesterday painted a mixed picture. The National Association of Realtors said existing home sales and prices climbed in May. But the Commerce Department said orders for durable goods, long-lasting items like cars and refrigerators, fell.

Inflation is muted, with prices inching up at a 1 percent rate. While Fed policy-makers call deflation risks minor, they are determined to prevent deflation from taking hold, given lack of experience fighting it.