Fed cuts rates to 39-year low FOMC slashes fed funds by 50 basis points as expected By Rex Nutting, CBS.MarketWatch.com Last Update: 2:24 PM ET Oct. 2, 2001 WASHINGTON (CBS.MW) - The Federal Reserve cut its overnight lending rate Tuesday by 50 basis points to 2.5 percent, a 39-year low. FRONT PAGE NEWS U.S. markets fall after Fed rate cut Fed cuts rates to 39-year low Rate cut's effecte on financials muted Compaq shares under pressure on latest warning Market news and more! Sign up to receive FREE email newsletters Get the latest news 24 hours a day from our 100-person news team. The rate reduction, which was widely expected in financial markets, came 15 days after the Federal Open Market Committee cut rates in an emergency move to restore confidence and liquidity after the Sept. 11 terror attacks.

The Fed also cut its discount rate by 50 basis points to 2 percent on a unanimous vote of the five board governors.

The FOMC said the terror attacks had "significantly heightened uncertainty in an economy that was already weak."

"Business and consumer spending as a consequence are being further damped," the statement said. Read the statement.

In the long run, the Fed said, prospects remain favorable once "unusual forces restraining demand abate."

The Fed reconfirmed that the risks to the economy remain weighted toward economic weakness.

The stock market fell on the news after a mild rally beforehand. See full story.

The U.S. central bank has now reduced its federal funds target rate by 400 basis points in nine steps this year as it tries to restore growth to the battered economy. See fed funds history.

The latest cut brings the real (inflation-adjusted) fed funds rate close to zero, which means banks can add to their reserves at basically no cost.

The fed funds rate is the rate banks charge each other for overnight loans to meet the Fed's reserve requirements. The discount rate is the rate the Fed itself charges for overnight loans. Read how monetary policy works.

Many analysts expect the FOMC to cut rates one or two more times by the end of the year. See our Fed policy forecast page.

Banks are expected to follow the Fed's lead almost immediately, lowering their prime-lending rate from 6 percent to 5.5 percent.

Some consumer rates for home-equity loans or credit cards could also fall as a result of the Fed's cuts. Many other rates, such as mortgage rates or corporate bond rates, will not necessarily move lower and could even go higher.

The rate cuts will benefit businesses before consumers but that's good because its businesses that generate jobs. However, as the businesses of American continue to slash jobs the economy will continue to weaken. We're in a downward spiral. Also, even if Americans start to spend more despite being heavily in debt, it doesn't benefit the U.S. much because WE'VE EXPORTED SO MANY INDUSTRIES THEREFORE JOBS. This recession is a great excuse to continue exporting jobs. Our unemployment rate is going to continue to go up no matter if interest rates are ZERO AND we're allowing unlimited labor to flow up from "south of the border". Put two and two together.

-- Guy Daley (guydaley1@netzero.net), October 02, 2001