Fed Unexpectedly Lowers Key Interest Rate

W A S H I N G T O N, Jan. 3 -- In a surprise move aimed at averting a serious economic downturn, the Federal Reserve cut a key interest rate by a half-point today. Not since the Asian currency crisis in late 1998 has the central bank altered its policy in between regularly scheduled meetings of its interest rate committee.

The Fed cut its target for the federal funds rate — the interestbanks charge each other on overnight loans — to 6 percent from 6.5percent, a nine-year high. It also cut its mostly symbolic discount rate by a quarter pointto 5.75 percent. The Fed said it stands ready to cut the discountrate by another quarter point to 5.50 percent on the request ofFederal Reserve banks.

A stock market weary of bad surprises reacted euphorically. Within minutes, the Nasdaq index more than made up for Tuesday’s 7 percent loss. The Dow Jones industrial average surged more than 300 points.

“It was like somebody flipped a switch,” said investment strategist Art Hogan. “The noise level, trying to get stocks in, trying to buy stocks both on the Nasdaq and the New York Stock Exchange … [it] was absolutely incredible, the level of activity.”

Effect on Bush Tax Cut?

President-elect George W. Bush said he was pleased with the Fed’s surprise cut and said the move will not derail his plans for a $1.3 trillion tax cut package.

“I thinkthe cut was needed,” Bush, holding a two-day meeting of keybusiness executives and chief executives in Austin, Texas, toldreporters. “It was a strong statement that measures must betaken to make sure our economy does not go into a tailspin.”

When asked whether the rate reduction would make it tougherto press his tax cut plan, Bush responded: “Not in the least.”

But economist Diane Swonk at Banc One said the Fed is sending a clear signal. “The message for the Bush administration [is] the Fed can take care of the economy, thank you very much, and tax cuts are not necessary,” Swonk said. “Greenspan has gone on record saying he prefers debt reduction over tax cuts. So I do think there was a political component there as well.”