Fed Cuts Key Rate to Spur Economy : But Reducing Discount Figure to 6% Will Help Few Industries, Experts Say
In an attempt to stimulate the sluggish economy, the Federal Reserve Board Thursday cut the discount rate from 6.5% to 6%, its lowest level in more than eight years.
But private economists predicted that the action would do little to ignite the economy, which has been growing at an annual rate of only about 2% since mid-1984.
Most interest rates have been drifting down for more than a month. Jerry Jordan, chief economist at First Interstate Bank in Los Angeles, said that the reduction in the discount rate, which is the interest rate charged by the Fed on its direct loans to banks, would probably not translate into substantially lower rates on consumer loans and other borrowing.
If the Fed had failed to act, said Lee Hoskins, chief economist at Pittsburgh National Bank, nervous financial markets “would have caused interest rates to increase sharply, with very negative implications.”
Little Help for Farms
Without a hefty reduction in rates, Jordan said, the nation’s most troubled industries will feel little benefit. “There’s no way the energy sector or agriculture is going to be helped by a half-point cut in the discount rate,” he said.
Hoskins said the sectors of the economy that stand to benefit the most from low interest rates--housing and autos--”are already going full bore” and will not be helped much by the latest drop.
The Fed said that its six governors voted unanimously to cut the discount rate, which is the only interest rate that is under the direct control of the nation’s central bank.
It said it acted “in a context of a pattern of relatively slow growth” both in the United States and abroad. It added that there is little danger that the reduction in the discount rate will ignite inflation because of the “relatively low prices of a number of important commodities.”
Top Reagan Administration officials, including White House Chief of Staff Donald T. Regan, had urged the Fed to act. White House spokesman Peter Roussel said: “We welcome the Federal Reserve Board’s reduction in the discount rate.”
Senate Majority Leader Bob Dole (R-Kan.), who also had sought a reduction in the discount rate, said: “It’s the first step in stabilizing and hopefully stimulating today’s sluggish economy.”
But most economists viewed the action as primarily a defensive measure to prevent dooming the economy to another few quarters of low growth or even a recession.
“This should have positive effect,” said Lee Ohanian of Security Pacific National Bank in Los Angeles. But, adding that any impact on economic growth might not be felt until next year, he termed the move “a defense against a recurrence of very low growth or even a recession next year.”
Cautious on Prime Rate
Bank economists were cautious about predicting what effect the Fed’s rate cut would have on the prime rate, the rate on which commercial banks base loans to their best customers.
The prime, now 8.5%, may not drop right away and may not fall more than 0.25% unless the Fed also lets the federal funds rate (the market rate for overnight interbank loans, which the Fed influences through its control of the money supply) fall well below its current range of 6.75% to 7%, Pittsburgh National’s Hoskins warned. “The Fed has been very niggardly on the funds rate,” he said.
The Fed last cut the discount rate on April 21, to 6.5% from 7%. Before that, Chairman Paul A. Volcker had dropped widespread hints that rate cuts would occur only in concert with similar moves by the central banks of West Germany and Japan, in an effort to maintain stability of the dollar against those key currencies while stimulating more growth in those economies.
But the only obviously coordinated tripartite rate cut occurred on March 7, when the Fed dropped the discount rate half a point to 7% and the Bank of Japan and the Bundesbank cut their rates by a like amount.
Since then, Volcker has had to accept unilateral moves by the United States, in part because the U.S. economy is clearly not growing at the 4% rate forecast earlier, in part because of growing pressure to do so from the Administration and Congress--and in part because of the recent addition of two Reagan appointees to the Federal Reserve Board.
Volcker to Testify
Tim Howard, chief economist at the Federal National Mortgage Assn. (Fannie Mae), said that the Fed probably thought it had to act before Volcker’s scheduled July 23 congressional testimony on Fed policies for the second half of the year.
“There have been persistent reports in the press that congressmen want the rate down, and the market had factored it in,” Howard said. “So, interest rates may go down a bit more, but this is not a real surprise. We’ve had the discount rate coming down since 1984, and so far the economy hasn’t really responded.”
