Fed Cuts Rates by 1/4 Point
NEW YORK – The Federal Reserve cut the key federal funds rate Wednesday by 0.25 percentage point, bringing it to 3.75 percent.
The Federal Open Market Committee, the panel responsible for setting the federal funds rate, announced its decision at 2:15 p.m. EDT Wednesday at the end of its regularly scheduled meeting.
In a brief statement, the Fed provided no explanation why it switched to a smaller cut, other than citing that ``continuing favorable trends bolster long-term prospects for productivity growth and the economy.''
On Wall Street, the Dow Jones industrial average quickly gave up a 33-point gain and more within minutes of the announcement but began recovering within the hour.
The federal funds rate is a key interest rate that influences the cost of borrowing money for everything from house to cars to refrigerators.
This is the sixth time the Fed has cut its interest rates this year in its attempt to end a dramatic slowdown in the U.S. economy. The series of cuts is the Fed's most aggressive rate-cutting effort since Chairman Alan Greenspan took office in 1987. Before Wednesday's move, the Fed, which began its credit-easing campaign in January, had last cut the funds rate on May 15
The Fed also cut its mostly symbolic discount rate, the interest that the Fed charges to make direct loans to banks, by 0.25 point to 3.25 percent.
Almost immediately, commercial banks, led by Bank of America and Bank One, began cutting their prime lending rates, from 7.0 to 6.75 percent, lowest since 1994. The prime is the benchmark for millions of consumer and business loans.
Fed: Further Cuts Still Possible
``The patterns evident in recent months - declining profitability and business capital spending, weak expansion of consumption and slowing growth abroad - continue to weigh on the economy,'' Fed policy-makers said in a statement.
In the part of the statement that reflects possible future action, policy-makers said their chief concern remained the threat that the weak economy could tip into recession. By keeping this policy directive, the Fed didn't close the door to further interest-rate reductions.
``The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future,'' the Fed said.
The Fed also said that it expects inflation pressures to remain contained.
While Wall Street almost unanimously expected the central bank will cut rates again, economists had been divided over the magnitude of that move.
A Reuters poll of firms that trade directly with the Fed found 14 dealers expected the Fed to opt for the smaller easing, while 11 expected a larger cut.
By opting for more moderate quarter-point cut, ``Fed policy-makers are saying the economy still needs help, but that they are now anticipating that the economy will soon rebound in response to their aggressive actions to date and tax rebates we will start getting in the mail,'' said Mark Zandi, chief economist at Economy.com.
Six to Nine Months
Economists are hopeful that the interest-rate cuts coupled with President Bush's signature on a $1.35 trillion tax relief bill will boost economic growth in the coming months.
As a rough rule of thumb, the Fed's interest-rate cuts take between six and nine months to make their way through the economy. Its first rate cut was on Jan. 3, so that reduction wouldn't show up in economic activity until July at the earliest.
Tax-cut refund checks are expected to begin arriving in mailboxes next month and if people spend some of that money, as economists predict, that would perk up economic growth, too.
The Fed's action come one day after a batch of economic data hinted that the economy may be stabilizing: Consumer confidence rose in June to its highest point of the year, orders for costly manufactured goods jumped in May and new-home sales were up last month.
Still, some economists believe economic growth in the current quarter may have slowed to an anemic annual rate of 0.5 percent, down from the 1.3 percent rate registered in the first three months of the year. Some economists believe the first-quarter performance will be revised lower by the government Friday.
The country has been mired in an economic slowdown since the second half of last year.
And despite the better-than-expected durable-goods report Tuesday, some economists worry that the recession that has hit the manufacturing industry could spread to other parts of the economy.
There's also a lingering fear that should the labor situation deteriorate seriously in the coming months, consumers -- whose spending accounts for two-thirds of all economic activity -- could cut back sharply and throw the economy into recession.
The nation's unemployment rate stands at 4.4 percent, but companies, coping with the economic slowdown, have been laying off workers.
Yet, most economists believe the Fed's aggressive action and tax relief will allow the country to skirt a recession this year.
Consumer spending has held up reasonably well through the slowdown. And, the housing and construction markets have remained stable thanks to low mortgage rates and interest rates in general. That strength also has served as a force helping to keep the economy afloat.
-- Reuters and the Associated Press contributed to this report