The Fed Opts for Quarter-Point Cut
The
Federal Reserve today
cut short-term lending rates by a quarter of a percentage point to 3.75%.
This is the sixth time this year the Fed has lowered the
fed funds target, the rate at which banks can borrow from each other. It ends the Fed's string of five half-point cuts.
Today's move seems to signal the Fed's intention to ease up on the forceful rate cutting it started Jan. 3. At the outset of the year, the funds rate stood at 6.5%. Since then, in response to the slowing economy, the Fed has engineered the most aggressive rate cutting in
Alan Greenspan's 14-year tenure as Fed chairman. At 3.75%, the funds rate is now at its lowest level since May 1994. The Fed has cut the funds rate 275 basis points since the beginning of the year.
"The patterns evident in recent months -- declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad -- continue to weigh on the economy," the Fed said in its statement announcing the cut. "The associated easing of pressures on labor and product markets are expected to keep inflation contained."
Most market-watchers had expected the Fed to pull back from its recent course and lower rates by a quarter-point. But as today's meeting approached, a growing chorus had speculated the Fed might go for broke and cut by a half-point.
After such aggressive cutting, however, Federal Reserve Board members began to express the view that their earlier work ultimately will begin affecting the economy, which was chafing under the restrictive 6.5% funds rate. Today's decision comes a day after a possible sign of improvement: The Conference Board's
Consumer Confidence Index, released yesterday, increased for the second-straight month.
The ever-vigilant Fed probably didn't want to back off completely and leave rates alone, however, considering the still-sorry state of the economy. Industrial production is low, business investment is poor and corporate profits continue to get squeezed. So the Fed's need to balance a weakening economy with the knowledge that its earlier efforts may be just starting to have an impact probably helped drive the decision to cut by 25 basis points instead of 50.
Chairman Greenspan, in remarks made May 24, said, "Owing to the variable and long lags of monetary policy, the effect of our recent policy initiatives will take time to strengthen financial portfolios and spill over into demand for goods and services ... we also need to be aware that our front-loaded policy actions this year should be providing substantial support for a strengthening of economic activity later this year."
Others, including Fed Gov. Lawrence Meyer, have expressed similar views. At this point, the Fed's impact on the economy and the market has been largely psychological, and perhaps members feel they should return to a gradualist mode.
The Fed next meets Aug. 21. Greenspan is expected to deliver his semiannual monetary policy report to
Congress
early next month.