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The US Federal Reserve on Wednesday reduced a key interest rate by one-half of a percentage point as the central bank tries to keep America's stop-and-go recovery from stalling amid rising worries about a war with Iraq.
Commercial banks were expected to respond by moving a benchmark consumer rate to its lowest point since 1959.
The Fed moved the federal funds rate from its already low 1.75 percent, where it had stood for 11 months, to 1.25 percent, surprising many analysts who had forecast a quarter-point move. They believed the Fed would want to conserve its power to aid the economy, given the bank's aggressive cuts last year that left it with little room to lower rates.
But analysts said the Fed apparently has grown so concerned about the weakening economy that it decided on bold action. In recent weeks, economic reports have shown unemployment rising to 5.7 percent, the manufacturing sector stumbling further and consumer confidence hitting a nine-year low.
"The Fed wanted to inject an element of surprise in an effort to boost financial markets and in that way lower risks from a wobbly economy and a possible war with Iraq," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.
Wall Street had climbed to its highest level in two months in anticipation of a Fed rate and finished Wednesday with the Dow Jones industrial average gaining 92.74 points to close at 8,771.01.
M&T Bank, a large regional bank with branches in the Northeast, and AmSouth, a bank with 600 branches in the Southeast, were the first to cut first to respond by cutting their prime rates to 4.25 percent, the lowest level for this benchmark rate for millions of consumer and business loans since May 1959. Similar moves were expected by other commercial banks in the coming days.
The Fed also returned to a neutral policy stance - indicating that economic risks were equally balanced between inflation and weak growth. In August and September, the Fed's statement was weighted more toward economic weakness.
Some analysts said they believed this switch was meant to signal the half-point cut would be the only one this year. Other economists said they thought a further reduction could come at policy-makers' meeting either in December or January.
"If things improve and a possible war with Iraq recedes, then they may not have to cut rates again. But my guess is that we will get another quarter-point move in January," said David Wyss, chief economist at Standard & Poor's in New York.
The rate cut came on a 12-0 vote of the central bank's policy setting Federal Open Market Committee. At its last meeting in September, the Fed had a rare double dissent as two members argued that the economic dangers were sufficient to warrant a move then.
In 2001, the Fed cut rates 11 times, including eight half-point reductions, as it fought a recession and the economic fallout from the terrorist attacks against the United States, pushing the funds rate to 1.75 percent, the lowest level since it stood at 1.17 percent in July 1961.
In a one-page statement explaining Wednesday's move, the Fed said it believed recent signs of a faltering economy demanded further action.
"Incoming economic data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production and employment," the Fed said.
In an optimistic note, the statement said, "Today's additional monetary easing should prove helpful as the economy works its way through this current soft spot."
Analysts said the rate cut will likely help sales of big-ticket items such as autos and homes. Sales of new and existing homes were already headed for record levels this year as mortgage rates have hovered at or just below 6 percent for much of this year, the lowest level since the mid-1960s.
Analysts predicted the half-point Fed rate cut will help keep rates around this level for the rest of this year.
Many forecasters say economic growth in the current October-December quarter could slow to just a 1 percent pace, down from a 3.1 percent growth rate in the third quarter.
Many economists said that with Republicans in control of both the House and Senate, the Bush administration is likely to move forward with legislation to stimulate growth.
"The economy is stalling out. It is not growing enough to generate jobs," said Mark Zandi, chief economist at Economy.com. "It is now incumbent on policy-makers to step up and provide fiscal stimulus."
(China Daily November 7, 2002)
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