Mon, May 07, 2001 EDT
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Fed Cuts Interest Rates Half a Point
   Fox Market Wire
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The Federal Reserve slashed the federal funds rate by a half-point Tuesday and indicated that it stands ready to do more if needed.

The Fed said it was cutting its target for the federal funds rate — the interest that banks charge each other on overnight loans — from 5.5 percent to 5.0 percent. That's the lowest since June 30, 1999, when the funds rate also stood at 5.0 percent. The announcement came at 2:15 EST.

The markets tanked shortly after the announcement, and by the end of trading the Dow Jones industrial average closed at 9,720.76 — down 238.35 points.

Broader market indicators followed a similar path. The Nasdaq composite index ended the day down 93.74 points at 1,857.44. That is the lowest closing since Nov. 13, 1998.

The Standard & Poor's 500 index closed at 1142.62, down 28.19.

The fact that the Fed opted for the half-point cut, instead of a more dramatic three-quarters, may indicate to some investors that the central bank is not entirely willing to do everything its can to combat the perceived recession.

The Fed's half-point decrease in the funds rate was expected to be quickly followed by announcements from commercial banks that they were reducing their prime lending rate by a similar half-point, to 8 percent, from 8.5 percent.

The prime rate is the key benchmark for millions of loans, from home equity and unpaid credit cards balances to short-term loans for small businesses.

The Fed also cut the largely symbolic discount rate, which it charges on direct loans to commercial banks, by half a point to 4.5 percent.

Concerns About Economic Recovery Linger

The Fed attributed the economy's weakness in part to production cutbacks at factories in the face of flagging demand.

Still, there are some positive signs for the economy, including: a solid housing market, aided by cheaper borrowing costs; still-low unemployment, which stands at 4.2 percent; and modest job growth, economists say.

Looking ahead, the Fed said its chief concern is the threat the economy will stall and fall into recession.

"The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," the Fed said.

Given the backdrop of a weak U.S. economy and economic turmoil overseas, the Fed said it "will need to monitor developments closely."

The huge sell-off on Wall Street, where the Dow Jones industrial average last week suffered its biggest weekly drop in 11 years, is another reason for concern.

With nearly half of all American households owning stock directly or indirectly, paper losses could make consumers feel a lot less wealthy and they could stop spending. That could put an end to the nation's record-long 10-year streak of uninterrupted economic growth, analysts say.

The Fed, in its statement, said that "persistent pressures on profit margins are restraining investment spending, and through declines in equity wealth, consumption."

The Fed cut interest rates twice in January, totaling a full percentage point. That was the biggest one-month decrease in rates since Greenspan took over in 1987. The first reduction came on Jan. 3, in a rare move between regularly scheduled meetings and the second cut came on Jan. 31.

— The Associated Press contributed to this report

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