Fed Cuts Rates by 1/4 Point

The Federal Reserve on Tuesday cut its key interest rates by a quarter of a percentage point, extending its aggressive rate-cutting campaign to lift the U.S. economy out of recession.

The widely expected move brought the federal funds rate charged on overnight loans between banks to 1.75 percent, the lowest in 40 years. It was the 11th rate reduction by the U.S. central bank this year, aimed at boosting consumer and business confidence with unemployment at a six-year high.

The fed funds rate is the U.S. central bank's key tool for setting the nation's monetary policy and signals the direction it wishes business and consumer lending rates to follow.

The Fed also lowered its more symbolic discount rate by a matching quarter percentage point to 1.25 percent.

In a statement explaining the decision, policymakers said economic risks remained tilted toward weakness, implying they will cut rates again if necessary even though — according to one measure of inflation — the real rate now stands below zero in inflation-adjusted terms.

"Economic activity remains soft, with underlying inflation likely to edge lower from relatively modest levels," the Fed said. "To be sure, weakness in demand shows signs of abating, but those signs are preliminary and tentative."

Beginning last Jan. 3, to avert a full-blown downturn this year, the Federal Reserve had already slashed interest rates 10 times, reducing its target for the federal funds rate from 6.5 percent down to 1.75 percent.

The 4.75 percentage points in total cuts this year represents the largest reduction in the space of a year since the Fed slashed the funds rate by 6.7 percentage points in the space of just six months in late 1981 as it battled the country's worst recession since the Great Depression.

Both share and bond prices rose modestly after the Fed's decision but gave up those gains later.

Another cut in January?

Analysts had widely divergent opinions on how to interpret the Fed decision and the relatively sparse explanation offered by policymakers.

"I'm struck by the pessimistic tone of the statement," said economist Sung Won Sohn of Wells Fargo & Co. in Minneapolis. "The Fed seems clearly to be concerned about economic weakness spreading and mushrooming, so they've not only cut rates today but left the door wide open for another cut in January."

Others said the prolonged easing, which has taken the federal funds rate down 4-3/4 percentage points this year for the sharpest decline in the funds rate since the deep recession of 1982, was nearly finished. 

The said the Fed's reference to the "abating'' of demand weakness was an early signal from policymakers. 

"We believe that there will in all probability be another interest rate cut at the Jan. 29-30 FOMC meeting, although the series of rate decreases is in our view nearing its end,'' said economist Bruce Steinberg of Merrill Lynch & Co. in New York.

In mid-November, retail sales jumped 7.1 percent after falling 2.1 percent in October, but that was largely due to surging new-car sales prompted by price discounts and financing incentives that analysts said were unlikely to be sustained.

And the key holiday shopping season has not been especially cheery so far. According to two reports released on Tuesday, retail sales at U.S. chain stores fell last week as Americans spent cautiously despite the upcoming holidays.

Most economists forecast a recovery beginning in the first half of next year and think, with the Fed running out of room to keep easing, the rate-cutting cycle must end soon.

David Jones, an economist with Aubrey G. Lanston & Co. in New York, said he thought the fed was offering "a glimmer of hope" about a consumer-spending fueled economic pickup ahead and said he saw only one potential rate reduction left.

"The bottom line is that while the Fed has left room for perhaps yet another quarter-point cut by the time of the next FOMC meeting on January 29-30, I think we're getting near the end of the long string of rate cuts," Jones said.

Reuters and the Associated Press contributed to this report.