Interest rates cut again
WASHINGTON (AP) – The Federal Reserve cut interest rates for the sixth time this year on Wednesday, but by just a quarter-point, sending a signal that its most aggressive recession-fighting effort in nearly two decades may be coming to an end.
Analysts said they still expected at least one more quarter-point move at the Fed’s August meeting, but they also said the country has probably seen the last of the bolder half-point rate reductions the Fed had been using to keep the record, 10-year economic expansion alive.
”The Fed left the door open to doing whatever it needs to do to get the economy moving again, but the dosage will be smaller,” said Allen Sinai, chief economist at Decision Economics in New York.
Wall Street investors, who had hoped for another half-point cut, took the smaller one in stride. The Dow Jones industrial average, which had been up about 25 points before the Fed’s mid-afternoon announcement, finished the day down 37.64 at 10,434.84. The Nasdaq composite index, however, rose a modest 10.12 to close at 2,074.74.
The quarter-point rate cut pushed the Fed’s target for the federal funds rate, the interest that banks charge each other, to 3.75 percent, down from 6.5 percent where it stood before the Fed began cutting rates on Jan. 3.
The Fed action was immediately followed by a quarter-point cut in commercial banks’ prime lending rate, sending the benchmark for millions of business and consumer loans down to 6.75 percent, the lowest level in seven years.
Analysts suggested the Federal Reserve’s quarter-point rate cut represented a compromise between Fed officials still concerned that the economy could tumble into a recession and an opposing Fed camp that is growing worried about overdoing the rate relief and sowing the seeds of higher inflation next year.
As evidence of the internal debate, analysts noted the Fed’s brief statement announcing its decision. The statement provided no explanation for why the central bank had decided to switch from a half-point cut to a quarter-point cut and instead dwelt on the continued threats to economic growth.
”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 statement said.
”It looks like the Fed was split down the middle and the quarter-point rate cut was a compromise,” said David Jones, chief economist for Aubrey G. Lanston & Co.
American manufacturers, who have been the hardest hit by the yearlong economic slowdown, expressed disappointment with the decision to move rates down by just a quarter-point.
”Manufacturing has been in recession for nine months and production losses have been comparable to the recession of 1990-91,” said National Association of Manufacturing President Jerry Jasinowski. ”There are still no clear signs of recovery.”
However, many private economists expressed confidence that the 2.75 percentage point rate reduction that has occurred since the beginning of the year – the most rapid Fed credit easing since 1983 – should lay the foundation for a sustained economic recovery beginning later this year.
They said such a favorable outcome would be helped by the first wave of the $1.35 trillion tax cut approved by Congress. Taxpayers will begin receiving checks of up to $600 next month.
Analysts said more favorable economic statistics in recent days including higher consumer confidence readings and a rebound in factory orders probably helped the Fed opt for a smaller cut.
”The Fed is saying the economy is weak, but not weak enough to justify another half-point rate cut,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.
The Fed’s statement did note ”continuing favorable trends” for long-term prospects including strong productivity growth.
Before Wednesday’s move, the Fed, which began its credit-easing campaign on Jan. 3, had last cut the federal funds rate at a regular meeting on May 15. Two of the five half-point cuts occurred between meetings.
As part of its action, the Federal Reserve also reduced its largely symbolic discount rate, the interest it charges banks on direct loans from the Fed, by a quarter-point to 3.25 percent.
Many economists believe that the economy has grown at a barely discernible 0.5 percent annual rate in the current April-June quarter, down from the weak 1.3 percent rate of the first quarter. But they are forecasting slightly stronger growth of around 2 percent in the third quarter, rising to above 3 percent in the fourth quarter.
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