Fed Cuts Rates by 1/4 Point

The Federal Reserve (search) on Wednesday cut its key interest rates by a quarter of a percentage point to 1958 lows and suggested it stood ready to take more action if the risk of falling prices worsened.

Fed Chairman Alan Greenspan (search) and his Federal Open Market Committee (search) colleagues reduced the federal funds rate (search) charged on overnight loans between banks to 1 percent from 1.25 percent, the 13th rate reduction since January 2001, when the Fed embarked on an aggressive rate-cutting campaign to rescue the economy from a threatening recession and the fallout from the Sept. 11 terror attacks.

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.

All but one member of the committee voted for the cut with San Francisco Federal Reserve President Robert Parry pushing for a more aggressive half-point reduction.

"Recent signs point to a firming in spending, markedly improved financial conditions and labor and product markets that are stabilizing," the FOMC said in its post-meeting statement.

"The economy, nonetheless, has yet to exhibit sustainable growth. With inflationary expectations subdued, the committee judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time," it added.

"Fed policy-makers are sending a message that the economy seems to be leveling out and conditions are in place for better economic performance in the coming months," said Lynn Reaser, chief economist at Banc of America Capital Management. "They are providing one additional nudge to help achieve that growth."

Markets gyrated following the decision with blue-chip stocks falling and Treasury bonds turning lower but the dollar rising. Many in financial markets had been hoping for a larger reduction of a half percentage point.

Top Wall Street dealers surveyed by Reuters last week were unanimous in anticipating a reduction in the current rates but divided about its size, with 12 dealers forecasting a half-percentage point and 10 anticipating a quarter-point reduction.

As in its statement following its meeting on May 6, the Fed was sanguine about prospects for future growth even as it voiced concern about the risk of deflation or falling prices.

"On balance, the committee believes that the latter concern is likely to predominate for the foreseeable future."

The Fed also lowered its more symbolic discount rate by a matching half-percentage point to 2 percent.

With the lowering of the funds rate on Wednesday, commercial banks were expected to cut their prime lending rates — the benchmark for many consumer and small-business loans — by a similar quarter point, from the current rate of 4.25 percent to 4 percent, the lowest level since May 15, 1959.

Wednesday's rate cut comes as the economy struggles to get back on firmer footing.

The quick, postwar economic boom that some economists had hoped for hasn't materialized. For the most part, businesses have been reluctant to ramp up capital spending and hiring, major factors holding back the economy's ability to return to full health.

Consumers, meanwhile, have been the main force keeping the economy afloat. Even they, however, have been more inclined to spend cautiously than to splurge amid the muddled economic climate and sluggish job market.

The economy grew at a mediocre 1.9 percent annual rate in the first three months of 2003. Economists don't believe the economy fared much better in the current April-June quarter and may have done worse. Forecasts of the second-quarter economic growth rate range from 1 percent to more than 2 percent.

The latest batch of economic reports released Wednesday morning highlighted the split personality of the economy's uneven recovery. Manufacturers saw demand for their products drop in May for the second straight month, while home sales soared, stoked by super low mortgage rates.

Still, economists are hopeful the economy will pick up more speed in the second half of this year, with some predicting a growth rate of around 4 percent. A new round of tax cuts signed into law by President Bush last month should help on that front, analysts say.

Even so, economists aren't expecting a quick turnaround in the job market. The nation's unemployment rate climbed to a nine-year high of 6.1 percent in May as businesses cut 17,000 jobs. Depending on the strength of economic growth in coming quarters, the jobless rate could hover in that range or move higher, economists say.

Reuters and the Associated Press contributed to this report.