Fed pins hopes on its latest cut

Associated Press

WASHINGTON — The Federal Reserve cut interest rates on Tuesday for the 11th time this year, capping its most aggressive string of rate cuts since the early 1980s.

However, in its latest move, the Fed cut a key interest rate by just a quarter-point rather than the bolder half-point moves the central bank has favored for most of this year.

Many economists saw this change as a clear signal that Federal Reserve Chairman Alan Greenspan and his colleagues believe they have done enough to lift the country out of its first recession in a decade.

Economists did not totally rule out one more quarter-point move at the Fed’s next meeting in early January as an insurance policy, but they said that rate reduction would occur only if economic statistics in the next month come in much worse than expected.

"I think the Fed senses the economy is finding a bottom and will begin to turn upward by early next year," said Mark Zandi, chief economist at Economy.com.

Wall Street received an initial lift from the Fed announcement, but those gains were lost after a disappointing earnings forecast from drug giant Merck. The Dow Jones industrial average finished the day down 33.08 at 9,888.37, its fourth straight losing session.

In its statement, the Fed said that "weakness in demand shows signs of abating" although it cautioned that as of yet those signs remained "preliminary and tentative."

The Fed’s latest action pushed its target for the federal funds rate, the interest that banks charge each other, down to a 40-year low of 1.75 percent. The Fed also reduced its discount rate, the interest it charges to lend money directly to banks, by a quarter-point to 1.25 percent, the lowest level on record.

Commercial banks immediately matched the Fed’s rate reductions by lowering their prime lending rate, the benchmark rate for millions of consumer and business loans, to 4.75 percent, the lowest level since November 1965.

The Fed’s hope is that the low borrowing costs will spur consumer spending and business investments, which will in turn trigger American factories to ramp up production.

In addition to easier credit from the Fed, President Bush is urging Congress to pass close to $100 billion in additional tax cuts for individuals and businesses, which administration officials contend would boost employment by 300,000 next year and lift economic growth by one-half percentage point.

The plan has been stalemated in Congress for weeks because of Democratic demands that the package include less in tax cuts for the wealthy and corporations and more support for unemployed and low-income workers.

However, the administration made a compromise offer on Tuesday that could lead to the stalemate being resolved.

"Movement toward a possible compromise on the stimulus package may be the best news of all from the point of view of business confidence," said David Jones, chief economist at Aubrey G. Lanston &Co. in New York.

Jones and other analysts said if Congress does pass a stimulus package before Christmas and the economy shows further signs of stabilizing, the Fed will leave rates unchanged at its next meeting at the end of January.

Beginning last Jan. 3, the Fed has reduced its target for the federal funds rate from 6.5 percent down to 1.75 percent, the lowest level since July 1961.