- The Washington Times - Wednesday, June 27, 2001

The Federal Reserve cut a key interest rate today for a sixth time this year. But the reduction was only a quarter-point, instead of the half-point moves taken since January.
In a brief statement, the Fed provided no explanation why it switched to a smaller cut, other than citing that "continuing favorable trends bolster long-term prospects for productivity growth and the economy."
Many economists had expected the smaller reduction, saying some Fed officials were growing concerned that its most aggressive credit-easing campaign in nearly two decades was laying the groundwork for higher inflation next year.
On Wall Street, the Dow Jones industrial average quickly gave up a 33-point gain and more within minutes of the announcement but began recovering within the hour.
The Fed cut its target for the federal funds rate, the interest banks charge each other on overnight loans to 3.75 percent, the lowest since April 18, 1994, when the funds rate also stood at 3.75 percent.
Almost immediately, commercial banks, led by Bank of America and Bank One, began cutting their prime lending rates, from 7.0 to 6.75 percent, lowest since 1994. The prime is the benchmark for millions of consumer and business loans.
Economists widely expected the Fed policy-makers to administer another bracing tonic to the economy in the form of a sixth interest rate cut. But they were divided over what they believed to be the right dosage: another half-point or a quarter-point reduction.
By opting for more moderate quarter-point cut, "Fed policy-makers are saying the economy still needs help, but that they are now anticipating that the economy will soon rebound in response to their aggressive actions to date and tax rebates we will start getting in the mail," said Mark Zandi, chief economist at www.Economy.com.
"However, they remain on high alert and we may get more easing in the months ahead," he added.
The decision came after closed-door two-day meeting of the Fed's chief policy-making group, the Federal Open Market Committee. The panel is composed of Fed Chairman Alan Greenspan, Fed governors and presidents of five of the 12 Federal Reserve banks.
"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," Fed policy-makers said in a statement.
In the part of the statement that reflects possible future action, policy-makers said their chief concern remained the threat that the weak economy could tip into recession. By keeping this policy directive, the Fed didn't close the door to further interest-rate reductions.
"The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," the Fed said.
The Fed also said that it expects inflation pressures to remain contained.
The Fed also cut its mostly symbolic discount rate, the interest that the Fed charges to make direct loans to banks, by one-quarter point to 3.25 percent.
Before Wednesday's move, the Fed, which began its credit-easing campaign in January, had last cut the funds rate on May 15, the fifth half-point reduction of the year.
Economists are hopeful that the interest-rate cuts coupled with President Bush's signature on a $1.35 trillion tax relief bill will boost economic growth in the coming months.
As a rough rule of thumb, the Fed's interest-rate cuts take between six and nine months to make their way through the economy. Its first rate cut was on Jan. 3, so that reduction wouldn't show up in economic activity until July at the earliest.
Tax-cut refund checks are expected to begin arriving in mailboxes next month and if people spend some of that money, as economists predict, that would perk up economic growth, too.

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