Federal Reserve Drops Interest Rates Again

WASHINGTON (AP)  The Federal Reserve cut a key interest rate Wednesday for a sixth time this year. But the reduction was only a quarter-point, instead of the half-point moves taken since January. In a brief statement, the Fed provided no explanation why it switched to a smaller cut, other than citing that ``continuing favorable trends bolster long-term prospects for productivity growth and the economy.''

Many economists had expected the smaller reduction, saying some Fed officials were growing concerned that its most aggressive credit-easing campaign in nearly two decades was laying the groundwork for higher inflation next year. On Wall Street, the Dow Jones industrial average gave up a 33-point gain and lost another 35 points within 15 minutes of the Fed's announcement. The Fed cut its target for the federal funds rate, the interest banks charge each other on overnight loans to 3.75 percent, the lowest since April 18, 1994, when the funds rate also stood at 3.75 percent.

Almost immediately, commercial banks, led by Bank of America and Bank One, began cutting their prime lending rates, from 7.0 to 6.75 percent, lowest since 1994. The prime is the benchmark for millions of consumer and business loans. Economists widely expected the Fed policy-makers to administer another bracing tonic to the economy in the form of a sixth interest rate cut. But they were divided over what they believed to be the right dosage: another half-point or a quarter-point reduction. The decision came after closed-door two-day meeting of the Fed's chief policy-making group, the Federal Open Market Committee.

The panel is composed of Fed Chairman Alan Greenspan, Fed governors and presidents of five of the 12 Federal Reserve banks. ``The patterns evident in recent months declining profitability and business capital spending, weak expansion of consumption and slowing growth abroad continue to weigh on the economy,'' Fed policy-makers said in a statement. In the part of the statement that reflects possible future action, policy-makers said their chief concern remained the threat that the weak economy could tip into recession.

By keeping this policy directive, the Fed didn't close the door to further interest-rate reductions. ``The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future,'' the Fed said. The Fed also said that it expects inflation pressures to remain contained. The Fed also cut its mostly symbolic discount rate, the interest that the Fed charges to make direct loans to banks, by one-quarter point to 3.25 percent.

Before Wednesday's move, the Fed, which began its credit-easing campaign in January, had last cut the funds rate on May 15, the fifth half-point reduction of the year. Economists are hopeful that the interest-rate cuts coupled with President Bush's signature on a $1.35 trillion tax relief bill will boost economic growth in the coming months.

As a rough rule of thumb, the Fed's interest-rate cuts take between six and nine months to make their way through the economy. Its first rate cut was on Jan. 3, so that reduction wouldn't show up in economic activity until July at the earliest. Tax-cut refund checks are expected to begin arriving in mailboxes next month and if people spend some of that money, as economists predict, that would perk up economic growth, too.

The Fed's action come one day after a batch of economic data hinted that the economy may be stabilizing: Consumer confidence rose in June to its highest point of the year, orders for costly manufactured goods jumped in May and new-home sales were up last month. Still, some economists believe economic growth in the current quarter may have slowed to an anemic annual rate of 0.5 percent, down from the 1.3 percent rate registered in the first three months of the year.

Some economists believe the first-quarter performance will be revised lower by the government Friday. The country has been mired in an economic slowdown since the second half of last year. And despite the better-than-expected durable-goods report Tuesday, some economists worry that the recession that has hit the manufacturing industry could spread to other parts of the economy. There's also a lingering fear that should the labor situation deteriorate seriously in the coming months, consumers whose spending accounts for two-thirds of all economic activity could cut back sharply and throw the economy into recession.

The nation's unemployment rate stands at 4.4 percent, but companies, coping with the economic slowdown, have been laying off workers. Yet, most economists believe the Fed's aggressive action and tax relief will allow the country to skirt a recession this year. Consumer spending has held up reasonably well through the slowdown. And, the housing and construction markets have remained stable thanks to low mortgage rates and interest rates in general. That strength also has served as a force helping to keep the economy afloat.