Federal Reserve Slashes Interest Rate By Another Half Point


The Federal Reserve cut a key interest rate Tuesday by a half-point, the fifth reduction this year, in an effort to keep the struggling economy afloat.

The Fed said the rate cut was needed to combat various drags on the economy, including a decline in business investment in new equipment.

``This potential restraint ... continues to weigh on the economy,'' Fed policy-makers said in a statement.

The Fed cut its target for the federal funds rate, the interest banks charge each other on overnight loans, to 4 percent. Stocks were mixed in the wake of the cut. A quarter-hour after the Fed's announcement, the Dow Jones industrial average was down 37 points, unable to sustain a 65-point gain. The Nasdaq index was up 12 points.

Many economists had predicted a half-point cut; others expected a quarter-point reduction. The Fed's action was expected to be quickly followed by announcements from commercial banks that they were reducing their prime lending rate by a similar half point, to 7 percent. The prime rate is the key benchmark for millions of loans, from home equity and unpaid credit card balances to short-term loans for small businesses.

The decision to cut rates came after the Fed's chief policy-making group, the Federal Open Market Committee, met privately.

The committee is composed of Fed Chairman Alan Greenspan, Fed governors and five of the 12 presidents of Federal Reserve banks. The Fed said its chief concern remains the threat of the economy stalling and falling into recession.