U.S. cuts rate to 45-year low to spark recovery ( 2003-06-26 07:01) (Agencies)
The Federal Reserve of the United States, still striving to coax the
struggling economy to stronger growth, cut a key interest rate Wednesday to its
lowest level since Dwight Eisenhower was the U.S. president.
While Fed Chairman Alan Greenspan and his colleagues repeated their concerns
that economic weakness could trigger a destabilizing fall in prices, they also
noted hopeful signs that recovery from the 2001 recession may finally be picking
up steam.
For that reason, many analysts said the Fed's 13th cut in its federal funds
rate could well be the last in a credit-easing campaign that began in January
2001.
At the same time, analysts said that by continuing to mention the remote
threat that the country could face a period of falling prices - deflation - the
Fed was signaling that it would keep interest rates down.
"The clear message is that rates are going to stay low for some time," said
David Wyss, chief economist at Standard & Poor's in New York.
Many economists believe the combination of the lowest
interest rates since the late 1950s and President Bush's new round of income tax
cuts will finally be enough to spur stronger economic growth starting in the
second half of this year but not before the unemployment rate, currently at a
nine-year high of 6.1 percent, edges up a bit more.
Vincent D'agostino shouts from the S&P 500 Futures trading pit
shortly after Fed Chairman Alan Greenspan's announcement on interest rates
Wednesday, June 25, 2003, at the Chicago Mercantile Exchange. [AP
Photo]
The rate cut, which the Fed approved by an 11-1 vote at the end of a two-day
meeting, pushed the funds rate, the interest that banks charge each other on
overnight loans, from 1.25 percent to 1 percent, the lowest level since it
averaged 0.68 percent in July 1958.
The nation's banks were expected to respond with a similar quarter-point cut
in their prime rate, moving the benchmark for millions of business and consumer
loans down from 4.25 percent to 4 percent. That would be the lowest since May
1959.
Wall Street investors, who had hoped for a bigger, half-point rate reduction
by the Fed, pushed stock prices lower after the central bank's afternoon
announcement. The Dow Jones industrial average finished the day down 98.32
points at 9,011.53.
The Fed action capped a remarkable seven-week period in which Greenspan and
other officials were able to trigger a big drop in long-term interest rates
simply by a series of well-chosen comments. Those started with a statement May 6
that raised concerns about an "unwelcome substantial fall in inflation," a
phrase that was repeated Wednesday.
In congressional appearances and speeches, Greenspan and other Fed officials
talked openly about the threats posed by deflation, something that has gripped
Japan for the past few years but has not been seen in the United States since
the Great Depression of the 1930s.
Those comments were seen as a signal not only that the Fed was prepared to
cut its already low rates further but, more importantly, planned to leave rates
low for the foreseeable future.
That sentiment triggered a huge rally in the bond market with increased
demand for bonds pushing down yields to record lows in many cases. Mortgage
rates fell to levels last seen in the 1950s. The 30-year mortgage, which has
been setting new records for several weeks, now stands at 5.21 percent.
Many analysts believe the Fed will not move the funds rate down below 0.75
percent or 0.5 percent for fear of destabilizing operations in money market
mutual funds.
In its statement Wednesday, the Fed struck a more positive tone than it had
in May, saying that there were a number of signs that the economy seemed to be
firming, including gains in consumer spending, growth in payrolls and "markedly
improved financial conditions," a reference to big gains in stock prices and
declines in interest rates.
"The Fed is telling us that the probability of an economic rebound is
improving," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.
The Fed's next meeting is not until Aug. 12, and Sohn and other analysts said
there should be enough signs of growth by that time that the central bank would
leave rates unchanged for the rest of the year.
But if the rebound fails to materialize, analysts said, the central bank will
cut again, at least by another quarter point.
The Fed began cutting rates in January 2001 as it tried to combat an
approaching recession that began in March of that year. It kept cutting rates in
an effort to insulate the economy from a series of shocks ranging from terrorist
attacks to corporate accounting scandals and then early this year consumer and
business uncertainty about what a war in Iraq might do.
The lone dissenting vote for the rate cut was cast by Robert Parry, president
of the San Francisco Fed, who argued for a bigger half-point move.
