Fed cut rates for sixth time -- but only a quarter-point
( 2001-06-28 11:42 ) (7 )

The Federal Reserve, seeking to add impetus to an apparent tepid US economic recovery, cut key interest rates Wednesday for the sixth time this year, but disappointed some by easing rates only a quarter-point.

The Federal Open Market Committee lowered its target for the federal funds rate by 25 basis points to 3.75 percent, and made a 25 basis point reduction in the largely symbolic discount rate to 3.25 percent.

The central bank, concluding a two-day meeting here, said the risks facing the US economy remain tilted toward weakness -- apparently signaling it is prepared to cut rates further if needed.

"Although continuing favorable trends bolster long-term prospects for productivity growth and the economy, the Committee continues to believe that ... the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," the Fed statement said.

The panel noted that the easing of the labor market and other economic conditions were "expected to keep inflation contained."

Commercial banks followed suit in cutting rates, and Bank of America, Bank One, Wells Fargo, FleetBoston and Wachovia were among those to announce a cut in their prime rate to 6.75 percent from seven percent.

The move marked the sixth reduction in the federal funds rate since the beginning of the year, for a total of 275 basis points, or 2.75 percentage points.

By making credit available more cheaply, the Fed move seeks to revive a US economy that expanded at a sluggish 1.3 percent rate in the first quarter, with little evidence of improvement in the current quarter.

But in the days leading up to the meeting, a slew of data suggested an impending recovery, albeit tepid, in the US economy.

Some observers were hoping for a half-point cut to match the five earlier reductions in rates, but others maintained that such a move could rekindle inflation as well as send a signal that the economy is in bad shape.

Merrill Lynch chief economist Bruce Steinberg said the Fed appeared to be unsure of how quickly the economy is recovering.

"We had hoped for a bigger 50 basis-point move, because the economy remains very weak and could've used the boost," Steinberg said.

"Oddly, the statement accompanying the move was uniformly negative in its assessment of the economy, which would have been consistent with a bigger move. We assume that the FOMC was divided and that the smaller 25 basis-point move allowed a consensus to be formed."

Josephthal, Lyons and Ross chief equities strategist Larry Rice said a half-point cut would have lowered the "real rate of interest" -- the Fed funds rate minus the rate of annual inflation -- to just one percent, which he said would be "too low."

Morgan Stanley senior equities trader Michael Lyons said the move was "a big disappointment" to investors but suggested that Fed officials chose the smaller rate cut "because they didn't want to send a message that they think the economy is in very bad shape."

Joel Naroff of Naroff Economic Advisers said the move may be an "indication that the Committee is not as worried as they had been in the previous few months" about the state of the US economy.

Naroff said the decision could signal an end of the cycle of rate cuts as the effects of the earlier cuts kick in, along with the stimulus from the federal tax cut.

"I think the Fed looked at things and decided that they are on course and will proceed more gradually," said Greg Smith of Prudential Securities.

"I don't think that accomplishes very much. I think that if they had been more aggressive on rate cuts, you would have hoped that it meant the Fed was anxious and aggressive about getting things going again. We are now left to wonder how urgent it is for things to get better, or whether they are satisfied to have the economy meander along, without going any place in particular."