Fed Cuts Rates by 1/2 Point, As Expected

The Federal Reserve Tuesday cut the federal funds rate by 0.5 percentage point, bringing it to 4.00%.

The Fed announced the move at the end of its regularly scheduled meeting.

This is the fifth time the Fed has cut its interest rates this year in its attempt to end a dramatic slowdown in the U.S. economy.

With the Fed's move, the federal funds rate hit its lowest level in seven years. The federal funds rate is a key interest rate that influences the cost of borrowing money for everything from house to cars to refrigerators.

The Fed also cut its mostly symbolic discount rate, the interest that the Fed charges to make direct loans to banks, by one-half point to 3.5 percent.

The central bank last cut rates on April 18 after an emergency telephone conference call convened by Greenspan, the second time this year the Fed took the unusual step of changing rates outside its normal meeting schedule.

The central bank had slashed interest rates by 2.5 percentage points this year.The series of cuts is the Fed's most aggressive rate-cutting effort since Chairman Alan Greenspan took office in 1987. 

The move had been widely expected. In a Reuters poll taken on Friday, all but one of the 25 primary dealers of government securities, the firms that trade directly with the Fed in money markets, said they expected a half-point cut on Tuesday. Only one firm predicted a quarter-point cut.

The Fed's action comes against the backdrop of a beleaguered manufacturing sector, which many believe is in a recession of its own, and a weakened job market.

One of economists' biggest fears is that the nation's unemployment rate, which climbed to 4.5 percent in April, will continue to rise and prompt Americans to cut back sharply on spending and tip the economy into recession.

Consumer spending has been the main force keeping the economy afloat, and a fifth rate reduction would aim to keep it that way. The Fed's interest rate cuts lower borrowing costs and are designed to spur consumers to spend and businesses to invest, both of which bolster economic growth.

Even with the all the gloomy economic news, there's been some ray of light poking through the clouds. Housing and construction activity, another pillar for the economy, has held up well during the slowdown. And consumers, who account for two-thirds of all economic activity, have continued to spend.

Economists are hopeful that the economy, mired in a slowdown since the second half of last year, will return to more healthy growth later this year.

The economy grew at an annual rate of 2 percent in the first three months of this year, twice as fast as the 1 percent growth rate registered in the fourth quarter. But many economists believe the economy has lost altitude in the current quarter.