The Federal Reserve cut key U.S. interest rates by half a percentage point today, in a direct response to the stalling economy and an urgent attempt to prevent the country from falling into recession.
The Fed said the current economic deterioration called for a "rapid and forceful" response and signaled it would act again if needed.
The move, which was widely expected by financial markets and followed a surprise half-percentage point rate cut earlier this month, took the bellwether fed funds overnight bank lending rate to 5.5 percent from 6 percent, and erased all the rate increases of 2000.
To underline its determination to keep the record U.S. expansion on track, the powerful central bank also cut the discount rate on direct Fed loans to commercial banks by a half-point to 5.0 percent.
Stocks closed mixed after initially falling as the news broke. Investors interpreted the Fed's mid-afternoon announcement as a reason to take profits from the market's recent gains. Although they know lower rates should eventually lift earnings and the economy, investors weren't sure how long that would take.
The Fed's Reasons
In a statement released after a two-day session of the rate-setting Federal Open Market Committee, the Fed said it still views excessive weakness as the main risk to the U.S. economy, suggesting it remains open to further rate cuts should the economy continue to deteriorate. The FOMC next meets on March 20.
Justifying its decision, the Fed said: "Consumer and business confidence has eroded further, exacerbated by rising energy costs that continue to drain consumer purchasing power and press on business profit margins." It also cited the resulting drag on retail sales and business spending on capital equipment.
David Jones, chief economist at Aubrey G. Lanston, a New York Securities firm, said the Fed is showing a rapid and forceful response and will continue to do so as needed to keep the country out of an economic crisis. "My guess is that we won't go into an all-out recession. We'll flirt with a recession in terms of seeing approximately no growth in the first quarter of this year, but I do believe the Fed will cut rates enough."
"By cutting interest rates for the second time in a month, the Fed is trying to do anything it can to keep economy from weakening further. They are concerned about declining consumer and business confidence," added Gary Thayer, chief economist at AG Edwards & Sons in St. Louis.
Widely Anticipated Move
Ahead of the announcement, analysts were nearly unanimous that the Fed would slash rates to 5.5 percent to signal its wish for cheaper credit as a stimulant for a sluggish economy.
Many noted that Fed Chairman Alan Greenspan, in testimony to lawmakers last week, said it was a "critical issue" whether weakening sales and production were enough "to breach the fabric of consumer confidence."
Richard Rippe, chief economist at Prudential Securities in New York, said today's announcement was so important because the economy's flirtation with recession has made it vulnerable. "The good news here is that help is on the way. The Fed will be cutting interest rates further and there's likely to be a tax cut enacted and those measures should gradually begin to improve the economy's performance."