Fed Cuts Interest Rates Again

W A S H I N G T O N, Jan. 31 -- 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 andforceful" response and signaled it would act again if needed.

The move, which was widely expected by financial marketsand followed a surprise half-percentage point rate cut earlierthis month, took the bellwether fed funds overnight banklending rate to 5.5 percent from 6 percent, and erased all therate 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 theresulting 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."