Fed Lowers Interest Rates

March 20, 2001 -- Moving to keep an increasingly weak U.S. economic expansion from petering out, the Federal Reserve today slashed short-term interest rates by a half-point for the third time this year.

With today's paring of the federal funds rate by 50 basis points, to 5 percent, the Fed has now initiated the fastest series of interest rate cuts during Alan Greenspan's 14-year reign as the central bank's chairman.

Hinting at the possibility of rate cuts to come, the Fed said its chief concern continues to be the threat that the economy will fall into recession.

"The risks are weighted mainly toward conditions that maygenerate economic weakness in the foreseeable future," the Fedsaid in a statement accompanying the announcement on rates.

The Fed governors also today approved a 50-basis-point reduction in the discount rate, to 4½ percent.

The move to lower interest rates comes as Wall Street's bull market has morphed into a menacing bear. Indeed, investors have shrugged off the Fed's two rate cuts earlier this year. The Nasdaq is down about 18 percent in 2001 and has lost about 63 percent of its value since its peak last March.

Fed Rates and the Dow

And the sell-off has started to broaden beyond technology shares. Last week, the Dow Jones industrial average had its worst week since 1989 and the S&P 500 officially entered bear market territory.

Traders pushed down stocks in heavy trading late today following the Fed's annuncement. The Dow dropped 238 points to 9,720.76. The Nasdaq tumbled 93 points to 1,857.44.

Some on Wall Street had advocated a more aggressive cut of 0.75 percentage point, saying it was needed to get consumers and businesses spending again.

Wall Street has fretted that a continued market slide would further erode consumer and business confidence, prompting a second wave of the ongoing business slowdown.

Investors can expect the Fed to initiate another rate cut, perhaps at its May meeting, said William V. Sullivan, Morgan Stanley senior vice president. "They indicated they are now worried about global economic conditions and they suggest that they're willing to act quickly in the future to support a sagging economy."

The overall economy continues to be buffeted by crosscurrents, with bleak news in one economic sector often followed by reports of resilience elsewhere.

Many analysts say the economy is still showing signs of strength, citing robust housing sales and low unemployment. But the manufacturing sector has been taking a beating.

"We've avoided a recession," Lynn Reaser, chief economist and senior market strategist for Banc of America Capital Management, said prior to the Fed action.

Reaser predicted that today's rate cut would help ease some of the anxiety that caused consumers and companies to tighten their belts. "The cuts will help the economy return to a better track," she said, by encouraging companies to make investments that lead to productivity gains, which in turn produce heftier profits.

Investors Still Looking for a Bottom?

It remains to be seen, however, whether today's Fed action convinces shellshocked investors to return to the stock market.

"While a half-point cut might be enough for business activity, it won't beenough for market psychology," Carl Tannenbaum, chief economist for LaSalle Bank/ABN AMRO told The Associated Press prior to the Fed announcement.

Today's move continues a series of rapid responses by the central bank to try to keep the nation's record-long 10-year streak of uninterruptedeconomic growth from ending.

Some observers have criticized the Fed chief for allegedly failing to steer the once-sizzling economy to a soft landing. Greenspan acknowledged in recent speeches that the economy has cooled much more rapidly than in earlier business cycles.

As recently as last fall the Fed was on record as seeing the prevailing economic risks skewed toward inflation. But Greenspan, famous for digesting reams of minutiae from all points in the economy, relaxed his inflation watch and switched to being a recession hawk the moment the new dangers became evident, said Jim Glassman, senior U.S. economist with J.P. Morgan Chase & Co.

"He turned the ship quickly," Glassman said.

ABCNEWS Radio contributed to this report.