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News > Economy
Fed cuts rates a quarter
June 27, 2001: 3:58 p.m. ET

Trying to ward off recession, U.S. central bank makes 6th cut in 2001
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NEW YORK (CNNfn) - The Federal Reserve cut short-term interest rates by a quarter of a percentage point Wednesday, its sixth cut this year, as part of a continuing effort to keep the U.S. economy from slipping into a recession.

The federal funds rate, the central bank's target for an overnight bank lending rate, now stands at 3.75 percent, its lowest level since April 1994. The Fed also cut the rarely used discount rate to 3.25 percent from 3.50 percent.

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The Fed, in a statement accompanying its decision, also indicated it may not be done cutting rates for the year, saying it still is concerned about the sluggishness of the economy.

"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.

Economists had expected a rate cut, but were divided about how big it would be, and were most interested in what the Fed would say about its possible future actions.

"From their statement, it sounds like the Fed is open to further easing," said Oscar Gonzalez, economist with John Hancock Financial Services. "Another [quarter-point cut] this year would not be unreasonable."

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graphicCNNfn's Tim O'Brien reports from Washington on Fed rate cuts.
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The Fed did not, however, hint of an inter-meeting cut by saying, as it has done in the past, that it would "monitor developments closely." That means any future cut might have to wait until its Aug. 21 meeting, eight weeks away.

"I'm a little bit surprised there isn't a 'monitoring' component [in the Fed's statement]," Bank One chief economist Diane Swonk told CNNfn's Money Gang program. "They certainly left themselves open to ease further if they need to, but there's no urgency to it."

Swonk pointed out, as other economists have, that the Fed may be waiting to see how its five previous rate cuts and a tax rebate impact the economy, an impact that's expected to be felt soon. (217K WAV) or (217K AIF)

Stocks dip, but only briefly

U.S. stock markets fell immediately after the announcement, as many traders were hoping for a more aggressive half-percentage-point cut, but recovered and were nearly unchanged in late afternoon trading.

Most analysts expected little stock market reaction to the cut; they have shown little interest in Fed rate cuts all year. Immediately after the last cut on May 15, the Dow Jones industrial average jumped to 12-month highs, but has fallen nearly 1,000 points since. The Nasdaq is slightly lower since that time.

Short-term U.S. Treasury bond prices dipped while long-term bond prices rose, as long-bond investors approved of the Fed's more moderate cut and hoped it would keep inflation risks in check.

Economy still slow

Despite relatively good news Tuesday about U.S. consumer confidence, new home sales, and orders for high-priced durable goods like cars and computers, the Fed believed, as did many economists, that the economy was still in the grips of the slowdown it's been suffering since the beginning of the year.

"Oddly, the statement accompanying the [cut] was uniformly negative in its assessment of the economy, which would have been consistent with a bigger move," said Bruce Steinberg, chief economist with Merrill Lynch. "We assume [Fed policy makers were] divided and that the smaller move allowed a consensus to be formed."

Click here for CNNfn's economic calendar

Though Fed policy can have little impact on slow corporate spending, high inventories and the lingering effects of the bursting of the technology-stock bubble last year all of which have contributed to the current slowdown it can cut rates to encourage consumer spending, which makes up two-thirds of U.S. economic activity.

  graphic FED Q&A  
    CNNfn.com's Mark Gongloff talks about the impact of the Fed's latest rate cuts.
  • Impact of rate cuts
  •    
    Since the beginning of 2001, the Fed has cut the federal funds rate six times, lowering it from 6.5 percent to 3.75 percent, its biggest series of cuts since it carved 5 percentage points from the rate between July 1990 and September 1992 at the end of the last recession.

    The rate is at its lowest since April 1994, when the Fed was just beginning to raise rates long after the recession was over, and its current cycle of cuts may be ending now.

    Click here for more on the Fed and rates

    "I think the Fed is coming to the determination the easing cycle is going to end and the economy should turn around," said Andy Brenner, senior vice president of global fixed income at Fimat. "Durable goods and consumer confidence showed strength. You just can't keep easing [by half-percentage points]."

    The Fed cuts rates to encourage the nation's biggest banks to cut their own interest rates, making money more readily available to consumers and businesses in the hope that they'll spend more and boost the economy.

    Shortly after the Fed's announcement Tuesday, in fact, Bank of America Corp. (BAC: down $0.08 to $60.32, Research, Estimates), Bank One Corp. (ONE: unchanged at $35.00, Research, Estimates), and other banks cut their prime lending rate to 6.75 percent from 7.0 percent.

    Still, aside from an immediate impact on the prime rate and other variable-rate debt such as home equity loans and some credit cards mortgage rates are already very low, and the Fed's latest rate cut may have little more effect.

    What the rate cut means to you

    Some analysts fear that too many interest-rate cuts could make money too easily available and fuel inflation, but the Fed is not yet concerned about inflation.

    "The associated easing of pressures on labor and product markets are expected to keep inflation contained," the Fed said. graphic

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