Fed Lowers Key Rate as Heavy Industry Lags : Economy: The Federal Reserve lowered the federal funds rate in an effort to counter recession fears. Analysts expect the rate to slip further.
The Federal Reserve, apparently worried about weakness in key manufacturing industries, has moved to ease credit slightly, government officials and analysts said Tuesday.
The key federal funds rate--what banks charge each other on overnight loans of reserves--moved down to 8.625% from 8.75%. The Fed can push the federal funds rate up or down by removing funds from the banking system or injecting funds into it.
In response to the latest move, traders said, the stock market pulled out of its dive. The Dow Jones industrial index rose 14.96 points Tuesday to close at 2,597.13. Bond prices also rebounded.
By itself, the small decline in the federal funds rate would have little effect on the economy, but most analysts expect rates to slip further in the weeks ahead.
“This is the typical Fed slow-motion easing, one tiny step at a time,” said David Hale, chief economist at Kemper Financial Services in Chicago. “There is little doubt that (Fed Chairman Alan) Greenspan wants rates down a little more.”
Although many economists had expected the Fed to postpone any further easing because of last week’s stronger-than-expected report on new jobs, a Bush Administration official said that top Fed officials have expressed concern about the slump in such industries as automobiles, appliances and construction.
“Greenspan likes to dig into the numbers, and what he’s seeing raises some warning signs,” the official said.
The Fed does not comment publicly on such actions.
Until this spring, the Fed had been pushing up interest rates for about a year in an effort to slow the economy and curb inflationary pressures. Starting in June, the Fed allowed the federal funds rate to drop in a series of small steps from a peak of about 9.75% to about 9%.
After the sharp drop in the stock market on Oct. 13, the central bank injected additional funds into the banking system to help reduce the danger of a spreading panic, allowing the key rate to fall to 8.75%.
While most analysts believe that economic growth will continue at a relatively slow rate, recent evidence makes some economists fear a recession might start this winter.
“We’re seeing all kinds of signs that the economy is slowing and there is the danger of heading into a recession,” said Lyle Gramley, a former Fed governor who is now chief economist at the Mortgage Bankers Assn. “The Fed is behaving prudently by moving to reduce that risk.”
David Berson, chief economist at the Federal National Mortgage Assn. here, said the federal funds rate should fall to 8.5% soon. “Greenspan likes to move policy in many small moves,” he said. “This Fed doesn’t want to move too far in any one direction in case they are wrong.”
Some Fed watchers expressed doubts, however. “I’m still agnostic on Fed easing,” said James Capra, a bond market specialist with Shearson Lehman Hutton in New York. “This is not the way this Fed normally makes its moves.”
