Federal Reserve makes large, unexpected interest rate cut

greenspun.com : LUSENET : Unk's Wild Wild West : One Thread

http://biz.yahoo.com/apf/010103/fed_intere_13.html

Wednesday January 3, 7:01 pm Eastern Time

Fed Cuts Interest Rate Half a Point

In the First Decrease in Two Years, Federal Reserve Unexpectedly Cuts Key Interest Rate by Half a Point To Avert Serious Economic Downturn

By MARTIN CRUTSINGER
AP Economics Writer

WASHINGTON (AP) -- The Federal Reserve, confronted with new evidence of a rapidly weakening economy, took the dramatic action Wednesday of lowering a key interest rate by half a percentage point, the biggest reduction in more than eight years.

Wall Street soared on the surprise announcement, and President-elect Bush voiced his approval. He said such ``bold action'' was needed to avert recession.

The reduction to 6 percent in the Fed's target for the federal funds rate, the interest that banks charge each other, was approved during an emergency telephone conference call between Federal Reserve Chairman Alan Greenspan and members of the Fed's rate-setting committee.

It marked the first time in Greenspan's 13 years at the Fed that he has used a conference call to launch a cycle of rate reductions.

Analysts said the decision to act without waiting for the Fed's next regular interest-rate meeting on Jan. 30, and the size of the cut at one-half point instead of a quarter-point, underscored the seriousness with which Greenspan and his colleagues viewed the threats facing the economy.

``This is a very aggressive move and indicates a high level of concern. If it's not panic, it's close to it,'' said Mark Zandi, chief economist at Economy.com, a West Chester, Pa., consulting firm.

The Dow Jones industrial average jumped out of negative territory to rise by almost 380 points before closing the day up 299.60 points at 10,945.75.

The technology-heavy Nasdaq index, which lost close to 7 percent of its value on Tuesday alone, jumped 324.83 points, or 14.2 percent, to close at 2,616.69, its biggest one-day gain ever.

``Greenspan recognized that the Fed was clearly behind the curve and had to do something pretty dramatic to reverse the worsening economic landscape,'' said Sung Won Sohn, chief economist for Wells Fargo in Minneapolis.

The half-point rate cut triggered similar reductions in commercial banks' prime lending rates, the benchmark for millions of personal and business loans. Chase Manhattan Bank and Morgan Guaranty Trust led the way with a reduction from 9.5 percent, a nine-year high, to 9 percent.

Analysts predicted that Wednesday's rate cut would be followed by further reductions in coming months as the Fed moves to make sure the current slowdown doesn't worsen into a full-blown recession.

The half-point reduction by the Fed was the largest since a similar move in July 1992. It also marked the first time the Fed changed rates between meetings since it cut rates by a quarter-point in October 1998 as the Asian currency crisis sent shock waves through worldwide financial markets.

The 1992 rate cut occurred as the central bank tried to spur growth in an economy struggling to emerge from the 1990-91 recession, the only downturn during Greenspan's tenure at the Fed.

Some analysts saw Wednesday's surprise rate cut as an effort by Greenspan to avoid repeating the Fed's mistakes then.

``One of the lessons learned from the last recession is ... that the rate cuts should have been faster and in bigger doses,'' said Allen Sinai, chief economist at Decision Economics in New York.

Business executives and members of Congress who had pleaded for rate cuts applauded the Fed's decision.

Jerry Jasinowski, president of the National Association of Manufacturers, said the Fed obviously was influenced by a report Tuesday that a key index of manufacturing activity fell in December to its lowest point since 1991.

``I think what made the difference in the Fed's thinking was the combination of the meltdown in the stock market and the extremely rapid deterioration in manufacturing in December,'' Jasinowski said.

Bush received news of the Fed decision during an economic forum in Austin, Texas, where he was hearing firsthand from business executives of spreading economic troubles. He called the Fed action ``a strong statement that measures must be taken to make sure our economy does not go into a tailspin.''

Bush said among bold steps needed beyond rate cuts was approval of his proposal of $1.3 trillion in tax reductions.

The Clinton administration, in keeping with its long-standing practice of recognizing the Fed's political independence, had no comment on the rate cut.

In a statement explaining its decision, the Fed said it acted ``in light of further weakening of sales and production and in the context of lower consumer confidence, tight conditions in some segments of financial markets and high energy prices sapping household and business purchasing power.''

The central bank said it had the leeway to move because strong productivity gains had helped make sure that ``inflation pressures remain contained.''

Economists said the Fed's actions not only reflected misgivings about the weakening economy but were intended to send a message to Bush that the central bank was prepared to act quickly to spur the economy. In the past, Greenspan has been critical of using the projected budget surpluses to provide big tax cuts.

``While they are still arguing about a tax cut in Congress, the Fed can say `Look, we have already done something,''' said David Wyss, economist at Standard & Poor's.

On the Net:



-- (in@economic.news), January 03, 2001

Answers

http://www.dismal.com/todays_econ/te_010301_3.asp

-- (in@economic.news), January 04, 2001.

>> Bush said among bold steps needed beyond rate cuts was approval of his proposal of $1.3 trillion in tax reductions. <<

Bush went on to cite the 5-4 vote majority of Supreme Court justices who favored his election and the consequent 271 vote victory granted him by the Electoral College as further reason why his $1.3 trillion tax cut should be passed.

"Those 276 people want tax relief," Bush stated with a straight face, "And they deserve it!"

-- Brian McLaughlin (brianm@ims.com), January 04, 2001.


Market back up, woohoo!

-- Maria (anon@ymous.com), January 04, 2001.

Moderation questions? read the FAQ