FEDERAL RESERVE slashes interest rate by another half point

Tuesday, May 15th 2001, 12:00 am
By: News On 6

WASHINGTON (AP) _ 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.

``The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future,'' the Fed said in its statement.

The Fed also cut its mostly symbolic discount rate, the interest that the Fed charges to make direct loans to banks, by one-half point to 3.5 percent.

The Fed's action comes against the backdrop of a beleaguered manufacturing sector, which many believe is in a recession of its own, and a weakened job market.

One of economists' biggest fears is that the nation's unemployment rate, which climbed to 4.5 percent in April, will continue to rise and prompt Americans to cut back sharply on spending and tip the economy into recession.

Consumer spending has been the main force keeping the economy afloat, and a fifth rate reduction would aim to keep it that way. The Fed's interest rate cuts lower borrowing costs and are designed to spur consumers to spend and businesses to invest, both of which bolster economic growth.

Even with the all the gloomy economic news, there's been some ray of light poking through the clouds. Housing and construction activity, another pillar for the economy, has held up well during the slowdown. And consumers, who account for two-thirds of all economic activity, have continued to spend.

Economists are hopeful that the economy, mired in a slowdown since the second half of last year, will return to more healthy growth later this year.

The economy grew at an annual rate of 2 percent in the first three months of this year, twice as fast as the 1 percent growth rate registered in the fourth quarter. But many economists believe the economy has lost altitude in the current quarter.

The central bank last cut rates April 18, after an emergency telephone conference call convened by Greenspan. It was the second time this year the Fed took the unusual step of changing rates outside its normal meeting schedule.