Responding to Wall Street's quivering with a half-point reduction in a key interest rate Tuesday, the Federal Reserve issued a strong indication that it was poised to do whatever necessary to save the economy from a full-out recession.
The interest rate slash marked the third half-point reduction Fed Chairman Alan Greenspan and his colleagues provided this year to keep the nation's sputtering economy afloat and Wall Street was hoping Wednesday that the Fed would further cut rates when it meets again in two months.
However, the rate slash fell short of the 0.75 cut investors had been hoping for, and Wall Street was hardly comforted by the Fed move or the prospect of future cuts down the line. The market plummeted immediately after the announcement on Tuesday and opened lower on
In cutting the rates Tuesday, the Fed said it was concerned with "substantial risks" of
prolonged economic weakness. Specifically, it said production cuts
by manufacturers could continue for some time and that weak
economies around the world could become a further drag on U.S.
Economists believe the remarks hinted at the possibility of a
fourth interest rate cut before the Fed's next scheduled meeting
May 15, perhaps in a few weeks.
"The statement not only left the door open for another
intermeeting rate cut, it almost seemed to anticipate the need for
one," said David Orr, chief economist at First Union.
Mark Zandi, chief economist with Economy.com, believes the
economy needs another booster shot before May. "There's no way
they can wait eight weeks to move," he said. "I fully anticipate
an intermeeting rate cut."
With inflation posing little risks to the economy at the moment,
the central bank has plenty of room to cut interest rates again,
analysts said. A government report Wednesday showed that consumer
prices moderated in February, rising by 0.3 percent, half the size
of the big 0.6 percent gain posted in January. Still, February's
rise was slightly bigger than the 0.2 percent increase many
Fed policy-makers pledged to keep a close eye on the economy
between now and then. "In these circumstances, when the economic
situation could be evolving rapidly, the Federal Reserve will need
to monitor developments closely," the statement said.
The Fed's latest half-point cut lowered the target for the
federal funds rate, the interest that banks charge each other, to 5
percent, after half-point cuts on Jan. 3 and Jan. 31.
The 1.5-percentage-point cuts since the beginning of the year
marked the Fed's most aggressive rate-reduction effort in 16 years,
since the Fed under Paul Volcker slashed rates by 1.75
percentage points in the last two months of 1984.
Still, it will take a while for the rate-cuts to work their way
through the economy and show up as economic activity up to a year, analysts said.
Many economists forecast the funds rate will be cut as many as
three more times by the summer, dropping it to 4 percent. The Fed
often moves in quarter-point increments.
The half-point cut Tuesday was followed immediately by
announcements from banks around the country of reductions of a
corresponding half-point in prime lending rates benchmarks for
millions of consumer and business loans to 8 percent, the lowest
the prime rate has been since August 1999.
That means different types of loans that are linked to the prime
will see rates go down, such as some auto loans, home equity loans,
credit cards, student loans and short-term business loans.
With lower borrowing costs, people and businesses might feel
more inclined to spend and invest, something that would eventually
boost economic growth.
Moreover, "with less of households' paychecks going to service
debt, people will have extra money to spend," said Paul Taylor,
chief economist for the National Automobile Dealers Association.
"Lower rates also will spur more refinancing, which also will
leave households money to spend on other things."
Still, economists believe the real psychological boost to
consumers, who account for two-thirds of all economic activity, may
not be so much lower interest rates but the effect the Fed's action
has on the stock market.
Wall Street has been suffering through a huge sell-off. The Dow
Jones industrial average last week had its biggest weekly drop in
11 years. On Tuesday, the Dow, which had been trading around the
10,000 level at the time of the Fed's mid-afternoon announcement,
fell 238.35 to 9,720.76, its lowest close in two years. The Dow has
now lost 1,137.49 over the past eight trading sessions and is down
17 percent from its record high in January 2000.
If paper losses make consumers feel a lot less wealthy, they
might stop spending and send the economy into a recession,
The Associated Press contributed to this report.