- The Washington Times - Tuesday, August 21, 2001


The Federal Reserve, still trying to keep the U.S. economy out of a recession, cut a key interest rate today for the seventh time this year, lowering the federal funds rate by a quarter-point to 3.50 percent.
The reduction pushed the funds rate, the interest that banks charge on overnight loans, to its lowest level in more than seven years.
In response, commercial banks were expected to announce that they were reducing their prime lending rates, the benchmark for millions of consumer and business loans, by a similar quarter-point, to 6.50 percent, also the lowest level in seven years.
On Wall Street, stock prices dropped after the announcement, investors having anticipated the Fed's action. Within a quarter-hour of the announcement, the Dow Jones had dropped 30 points but was still up 13 for the day. The Nasdaq lost its slight gain and was down a point.
With the latest reduction, the Fed has cut rates by 3 percentage points since the beginning of this year, including five straight half-point rate reductions, which represented the Fed's fastest credit easing in nearly two decades.
The effort is aimed at jump-starting the U.S. economy, which has been lackluster for a year and slipped close to recession territory in the spring.
In explaining its latest rate move, the Fed said in a statement: “Household demand has been sustained, but business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the U.S. economy.''
The quarter-point move had been expected. Some analysts had said the central bank might opt for a larger half-point move in an effort to deliver a surprise to Wall Street investors, who had already factored in a quarter-point cut.
Signaling possible future moves, the Fed said the balance of risks going forward remains “weighted mainly toward conditions that may generate economic weakness in the foreseeable future.''
Many analysts believe the Fed will cut rates again at its next meeting on Oct. 2.
The Bush administration is counting on lower interest rates plus the impact of nearly $40 billion in tax rebate money this year to boost consumer demand and provide greater strength in the second half of the year.
Economists point to encouraging signs that an upturn may be imminent, including a report yesterday that the Index of Leading Economic Indicators rose by 0.3 percent in July, the fourth consecutive monthly gain.
The economy barely grew in the spring, managing only a 0.7 percent rate of increase in the gross domestic product, the poorest performance in eight years. Even that rate is likely to be lowered when the government revises the figure later this month.
Top forecasters surveyed by Blue Chip Economic Indicators said they were looking for a slight rebound to growth rates of 1.7 percent in the July-September quarter and 2.8 percent in the final three months of this year.
In addition to the change in the federal funds rate, the Fed also lowered its largely symbolic discount rate by a quarter point.

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