Fed Cuts Rates by 1/2 Point

The Federal Reserve on Tuesday slashed its key interest rates by a half percentage point for the second time in just over two weeks, in an attempt to counter any further damage to the U.S. economy.

The rate reduction brought the federal funds rate to 2.5 percent — its lowest level since May 1962.

The move was quickly matched by a half-point cut in commercial banks' prime lending rate, the benchmark for millions of consumer and business loans. That rate fell to 5.5 percent, a level last seen in October 1972.

Wall Street, which had suffered the biggest one-day point loss in history following the Fed's last rate cut on Sept. 17, had a better reaction this time around. The Dow Jones industrial average finished with a rally to jump 113.76 points to 8,950.59.

The Fed rate cut was the ninth this year in the central bank's effort to stave off a recession, aggravated by the Sept. 11 attacks. The Fed last cut its rates on Sept. 17 in a surprise move. Tuesday's action came at the end of the Federal Open Market Committee's regularly scheduled interest-rate session.

The Fed said the devastating attacks on New York and Washington which left nearly 6,000 dead or missing "significantly heightened uncertainty" in the already weakened U.S. economy.

"Nonetheless, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate," the Fed said in a statement explaining the decision.

The size of the rate cut was widely expected, with a Reuters survey showing that 21 firms forecast a half-point cut while four predicted a quarter-point cut.

Analysts, Business Leaders Welcome Cut

The Fed's latest rate cut was met with approval from business leaders.

"The Fed made an important and supportive move today that should mitigate the negative impact of last month's tragedy on the economy overall and help set the stage for a recovery in 2002," said Jerry Jasinowski, president of the National Association of Manufacturers.

Many economists believe the economy, which had slowed to a barely perceptible growth rate of 0.3 percent in the April-June quarter, will probably decline at annual rates of 1 percent in the July-September and October-November quarters.

While such an aggressive easing effort on the part of the Fed would normally raise fears of higher inflation down the road, analysts said there was little danger of that given how weak the economy is.

"It is entirely appropriate for the Fed to be pulling out all the stops now," said Bill Cheney, chief economist at John Hancock Financial Services in Boston. "The economy was stumbling before the attacks and it now seems all but certain that we will fall into a recession."

In addition to the Fed rate cuts and the increased stimulus spending from Congress, some analysts said the economy also needs quick success in the military battle against terrorism to restore confidence and get Americans spending again.

"How quickly the economy can come back will depend on what kind of progress we make in this war on terrorism," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "Significant progress will do wonders for consumer confidence, the stock market and the economy."

To avert a full-blown downturn, the Federal Reserve has slashed interest rates nine times this year, beginning with five half-point cuts in the funds rate followed by two quarter-point moves on June 27 and Aug. 21, and by two half-point moves on Sept. 17 and on Tuesday.

In a related move, the Federal Reserve cut its discount rate, the interest it charges to make direct loans to banks, to 2 percent, the lowest level since November 1958.

The Fed has used its discount window to pump out billions of dollars in direct loans to banks in the wake of the attacks to keep the financial system operating.

Reuters and the Associated Press contributed to this report.