As Expected, FOMC Votes to Lower Rates by 50 Basis Points

The Federal Reserve cut the fed funds rate by 50 basis points today to 5.5% from 6%, a move that was all-but-assumed by the financial markets. In cutting today, the Fed continues an aggressive round of easing that began Jan. 3, when it sliced the funds rate by 50 basis points in an effort to stop economic deterioration in its tracks.

Taken together, two moves in less than a month represent the Fed's most aggressive actions since late 1984. Steady worsening in the economy, including significant declines in retail sales, auto sales, manufacturing activity and business investment, prompted this month's actions.

Most economists believe the Federal Reserve is likely to cut the fed funds rate, the key short-term interest rate, by at least another half-percentage point by around the middle of the year. Currently, the March fed funds futures contract is fully expecting another 25-basis point cut, to 5.25%, by March 20, the date of the next Fed meeting. However, the Fed's actions are likely to be a good bit more gradual from now on, as the committee will be watching the next spate of economic reports and corporate earnings to gauge what measures to take.

Recent consumer confidence reports show that citizens believe the economy is weakening, with respect to their job prospects and assessment of financial conditions. Chairman Alan Greenspan , in his comments to the Senate Budget Committee last week, expressed grave concern that the perception of a weakening manufacturing sector, and by extension, the job market, could shatter consumer confidence and drive the economy into a dwindling growth cycle -- sort of the reverse of the "virtuous cycle" Greenspan expressed in the past.

Dwindling consumer prospects causes people to think twice about spending money; they put off purchases, which hurts companies further, causing layoffs and further depressing consumers. It's a scenario the Fed hopes to avoid.

The fed funds rate is the interest rate at which banks lend to each other overnight. The easier it is for banks to borrow money, the greater proclivity they have to extending credit to customers. The rate is actually not a rate, but a target -- the Fed sets a target and keeps it on target via open market operations .

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