Fed Lowers Key Discount Rate to 6% to Aid Economy

The Federal Reserve Board, in an emergency move to prop up the steadily worsening economy, lowered its key discount rate to 6% Friday in hopes of bolstering consumer confidence and spurring more bank lending.

The reduction from 6.5% marked the second time in five weeks that the Fed has lowered its benchmark rate and sparked a rally in the bond market. It also prompted several of the nation’s major banks to reduce their prime lending rates to 9% from 9.5%.

The discount rate is the interest charged by the Fed on overnight loans to banks.

The central bank acted less than an hour after the Labor Department published grim statistics showing that the number of jobs in the economy shrank sharply in January and confirming that the recession is continuing to worsen.

Although the overall jobless rate edged up only slightly--to 6.2% of the work force from 6.1% in December--industry payrolls shrank by 230,000 jobs--the second big monthly drop in a row.

And a companion survey encompassing workers in all sectors of the economy showed that overall civilian employment plunged by 650,000 jobs in January, pushing the number of people out of work to 7.7 million--up 1.2 million from its level of last June.

In California, where the jobless rate has skyrocketed since the onset of the recession in the latter half of last year, the state unemployment rate jumped to 7% from 6.8% in December. The national and state figures are computed using different surveys.

The stunning national job-loss figures reversed earlier signs that the recession finally may be moderating. Some analysts had been hoping that the number of jobs might actually begin growing again during January.

“The Fed normally doesn’t respond this quickly, but this was not just a bad number,” Donald Straszheim, chief economist for Merrill Lynch Capital Markets, explained after the discount-rate cut.

“This is weaker than anyone thought, including us,” Straszheim said. “It means the recession is far from over. I didn’t believe before and I don’t believe now that we are at the bottom by any means. This suggests we have six months of declining activity before us.”

David Wyss, an economist with DRI/McGraw Hill, a Lexington, Mass., firm, agreed.

“This report is bad any way you look at it,” he said. “The cut in the discount rate right on the heels of this report was obviously to try to send the markets an encouraging signal.”

The Fed’s latest move followed earlier indications by Chairman Alan Greenspan that the central bank was worried about the economy and was planning a series of moves to help stem the slide.

Barely a week ago, Greenspan had seemed relatively optimistic about the outlook for the economy, suggesting that the recession may already have hit bottom. But this week he appeared less sanguine, warning that the recession could deepen if no new action were taken.

The central bank has been pushing interest rates lower for several weeks but apparently without the desired effect. Greenspan told Congress earlier this week that, despite the rate cuts, banks were not resuming their lending rapidly enough, thus choking any recovery.

The figures on job losses were not the only bearish statistics to come out Friday. In other signs of economic deterioration, the Commerce Department reported that construction spending fell an additional 0.5% during December, following a 1.5% decline in the previous month.

And the National Assn. of Purchasing Management reported that its monthly survey of business orders--a closely watched gauge of future business activity--plunged to 37.7% in January, down from 40.4% in December, the lowest reading since May, 1982.

In reducing the discount rate Friday, the Fed timed its action to take effect just before the financial markets opened, hoping for--and getting--an immediate impact. As interest rates tumbled, the dollar weakened.

Analysts said that some traders were particularly impressed because the action occurred despite a decision by the West German Bundesbank on Thursday to raise key interest rates in that country, which ordinarily might have prevented the United States from lowering rates.

The fact that the Fed reduced rates anyway was considered a strong sign that the central bank is serious about stemming the recession in the United States.

The Fed’s action Friday was welcomed quietly by Administration officials, who had been pressing the central bank to push interest rates lower.

The use of the highly visible discount rate marked an escalation in the Fed’s anti-recession efforts. The central bank has been nudging down the federal funds rate for months, but it has been more sparing in cutting the discount rate.

Friday’s figures on employment showed that the bulk of the increase in joblessness in January occurred among teen-agers, who had been working over the Christmas school break and then returned to classes.

The jobless rates for most other categories of workers remained essentially unchanged.

Even so, the decline in overall payroll employment was spread throughout virtually every major industry in the economy, including manufacturing, which suffered a dip of 69,000 jobs over the month.

The 6.2% unemployment rate last month was the highest in nearly four years.

Janet L. Norwood, commissioner of the Bureau of Labor Statistics, noted in a statement that the unemployment rate has remained relatively stable in the face of the downturn, partly because the number of people seeking work is growing less rapidly than in the last recession.

The unemployment rate represents the percentage of people in the labor force who say that they cannot obtain jobs. One reason the rate did not soar higher is that the overall size of the labor force declined in January. Analysts were unable to explain why.

Nevertheless, Norwood pointed out that about 900,000 factory jobs have been lost over the last two years--”half of them in just the last five months.”

The decision by the Fed to cut the discount rate came on a unanimous vote of its board of governors. The board said in a statement that the action was taken “in light of further declines in economic activity” and continuing sluggishness in the growth of the money supply.

On Dec. 18, the Fed cut the discount rate to 6.5% from 7%, the level at which it had been held since February, 1989. The last time the discount rate was at 6% was in August, 1989.

JOB LOSS: The unemployment figures indicate that the recession is eliminating California jobs. D1