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News > Economy
Fed cuts rates again
April 18, 2001: 2:06 p.m. ET

Central bank makes another half-point cut in key rates between meetings
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NEW YORK (CNNfn) - The Federal Reserve cut short-term interest rates by an aggressive half-percentage point Wednesday in a surprise move between its regular meetings meant to avert a recession.

The central bank's policy makers cut the target for the federal funds rate, an overnight bank lending rate, by a half-percentage point to 4.5 percent. They also lowered the rarely used discount rate, for loans by the Fed to banks, a half-percentage point to 4 percent.

The move comes just weeks before the next regularly scheduled meeting of the Federal Open Market Committee, the policy-making arm, on May 15.

Diane Swonk, chief economist at Bank One, told CNNfn's The Money Gang Wednesday that the Fed waited for the markets to stabilize before going ahead with an inter-meeting cut. (WAV 222KB) (AIFF 222KB)

graphicWednesday's rate cut is the is the fourth by the Fed this year, and the second in between its regular meetings. On March 20, the Fed lowered interest rates by a half-percentage point.

Almost immediately, banks began cutting their overnight lending rates as well as rates on consumer loans, making it a good time for consumers to refinance mortgages or apply for a loan.

The severe slowdown in capital spending by big corporations "threatens to keep the pace of economic activity unacceptably weak," the central bank said in its statement. "As a consequence, the (Open Market) committee agreed that an adjustment" in rates was needed before the Fed's next regular meeting in May.

The rate cut came just hours after the U.S. Commerce Department reported the trade deficit fell to its lowest level in 14 months in February, and a slew of economic reports from housing starts to export prices that  indicated a bigger improvement in the economy than analysts expected.

That positive news, along with stronger-than-expected manufacturing data reported Tuesday, had dampened Wall Street expectations for an inter-meeting move by the Fed because the data indicated the economy was not in such bad shape as initially thought.

For more on the Fed and interest rates, click here

So Wednesday's rate cut caught many investors by surprise, and stocks, already higher on cautious optimism over earnings, soared within minutes after the Fed's move.

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graphicCNNfn's Christine Romans reports from NYSE on reaction to Fed's surprise rate cut.
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At 11:47 a.m. ET, the Dow was up about 4 percent and the tech-heavy Nasdaq composite index jumped about 8 percent. The tech-heavy Nasdaq was up another 2 percent in afternoon trading.

"What I think this means is that the Fed waited maybe for the stock market to go up a little and then cut rates and effectively reinforced the price action," Joseph LaVorgna, senior economist with Deutsche Banc told CNNfn's Market Call. "Therefore it set a bottom on stocks, but it's definitely a very good move I think for the Fed."

In spite of the rate cut and its positive effect on the markets, the Fed hinted in its statement that it was leaning toward future rate cuts because it still sees a risk for economic weakness, even though inflation remains in check.

"The committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth, and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," the Fed said in its statement.

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  (The potential for dampened capital spending, reduced equity wealth and slower growth abroad) threatens to keep the pace of economic activity unacceptably weak.  
     
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  Federal Open Market Committee statement  
Swonk said she believes the Fed will cut interest rates another 50 basis points at its May 15 meeting.

"The Fed is willing to overshoot the mark. I want to underscore that we're catching up. We're getting the market back in line, but we're not going to see positive earnings from that until we get into the third quarter," Swonk said.

The rate cut Wednesday ended weeks of anticipation by investors and analysts who hoped the central bank would lend a confidence-boosting jolt to markets that have been seesawing for months.

The tech bubble burst in the last year as e-commerce companies folded by the dozens and slackening demand left companies across all sectors with bloated inventories. That led to big layoffs and production cutbacks that had analysts debating whether the economy was headed toward a recession.

"I think it's probably them worried more just about a very weak economy than whether it's a soft landing or a recession," LaVorgna said. "But the Fed, they don't really care. They just want to see the economy get back up."

The White House had no immediate comment on the Fed's move although analysts are speculating about what, if any, impact the rate cut will have on President Bush's tax cut plan. Bush in recent days has frequently cited the slackening economy as a major driver to push his tax cut plan, a major component of his administration, through Congress. graphic





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