Market Reacts as Fed Triggers Fall in Interest Rates

The Federal Reserve Board moved to push down interest rates today, forcing the first drop in rates in seven months through an aggressive injection of money into the banking system, economists said.

The move came a day after Federal Reserve Chairman Alan Greenspan surprised the market by saying that because of a potential credit crunch, the central bank may ease up in its monetary policy. Analysts predicted that this would involve an effort to push market rates lower.

The Fed added reserves in an apparent move to push the closely watched federal funds rate down to 8% from the previous target level of 8.25%. Additional money in the banking system pushes the free-floating fed funds rate lower, with the effect eventually spreading to the rest of the economy.

Soon after the Fed acted, the federal funds rate was 8.125%. It was the first time in seven months that the Fed has moved to push rates down.

“The market is obviously interpreting this as an easing,” said Stephen Roach, an economist at Morgan, Stanley & Co.