Fed Cuts Rates Quarter Point, Ready to Do More

By Glenn Somerville

WASHINGTON (Reuters) - The Federal Reserve (news - web sites) on Wednesday cut U.S. interest rates a quarter-percentage point, a more modest reduction than the five prior cuts this year, but signaled it stood ready to do more to boost a sagging economy.

The Fed action brought the federal funds rate, a benchmark for short-term rates throughout the economy, to 3.75 percent, its lowest level in more than seven years. The central bank also chopped the discount rate -- charged on direct Fed loans to commercial banks -- by a quarter point to 3.25 percent.

The vote on the discount rate change was unanimous.

Stocks fell immediately after the announcement, which dashed hopes for a steeper half-point cut, but recovered soon afterward. Economists took heart that the Fed, with its smaller reduction, was taking growing inflation fears into account.

``They are doing the best they can to stimulate the business sector by bringing longer rates down. This will put inflation fear to rest,'' said Christopher Low, chief economist at First Tennessee Capital Markets in New York.

There was no explanation in the statement issued after a two-day meeting of the policy-setting Federal Open Market Committee (news - web sites) for why the central bank opted for a smaller cut rather than the half-point reduction some economists were speculating it would choose.

In the statement, the Fed said it still sees excessive weakness, rather than inflation, as the main threat to the U.S. economy, indicating it stood ready to cut rates again should the economy deteriorate further.

``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. The associated easing of pressures on labor and product markets are expected to keep inflation contained,'' the Fed said in its post-meeting statement.

Significantly, the statement made no reference to the Fed closely monitoring economic conditions between now and Aug. 21, a potential sign the central bank was not mulling cutting rates between regular meetings, an action it has taken twice this year.

The Fed began the current cycle of easing with a surprise half-percentage point slash in rates on Jan. 3, between regular meetings. The rate-cutting campaign since then has been the steepest in the nearly 14 years that Greenspan has been at the helm of the U.S. central bank.

Little more than a year ago, the Fed was raising interest rates, citing inflation risks. But the severity of the slowdown that began in the middle of last year apparently caught Fed policymakers by surprise and led to charges subsequently that they were slow to recognize what was happening and to start adding stimulus by lowering borrowing costs.

Most analysts expect the U.S. economy, measured by gross domestic product, to register little or no growth during the second quarter that ends on Saturday. Manufacturing industries are in a steep slump that many characterize as a recession for the nation's industrial sector while consumer spending has lost some steam, though it has not evaporated entirely.

Economists say the greatest risk is that companies, hard-pressed for profits, may pick up the pace of layoffs and further reduce their investment plans.

That could prevent the hoped-for recovery in the second half of the year, increasing the risk that manufacturing sluggishness would spill into the broader economy and possibly strangle the record expansion that has continued unbroken since the last recession ended in March 1991.

-- Anonymous, June 27, 2001

Answers

Market closed relatively flat. Dow only off about 37 points.

-- Anonymous, June 27, 2001