Interest Rates Reduced by Fed : Recession: The board acts under pressure from the White House to bolster the sluggish economy. The discount and federal funds rates are affected.

The Federal Reserve Board, under pressure from the White House, lowered interest rates again on Tuesday in an effort to jump-start the sluggish U.S. economy.

In the midst of a public campaign by the Bush Administration to persuade Germany and Japan to join the United States in a round of worldwide interest rate reductions, the Fed cut its benchmark discount rate from 6% to 5.5%.

It also simultaneously moved to nudge its key federal funds rate from 6% to 5.75%.

The discount rate is the interest rate that the Fed charges commercial banks for loans. The federal funds rate is what commercial banks charge each other for overnight loans and is determined largely by the Fed’s movement of funds in and out of the banking system.

Reducing both key interest rates on the same day was a powerful step for the Fed and clearly was designed to signal its concern that the recession is continuing to linger longer than had been expected.

Tuesday marked the third time since December that the central bank has cut the discount rate, which traditionally has been regarded as its most visible lever for managing the economy.

President Bush immediately praised the Fed for its action, saying the move should help provide the economy with a “kick.”

“This is good; this will stimulate our economy; I think it will help worldwide as well,” Bush said.

Just hours after the Fed action, one pacesetting bank, the Southwest Bank of St. Louis, cut its prime lending rate, the rate it charges its best corporate customers, to 8.75% from 9%. Larger banks were expected to follow with rate cuts of their own in the next few days.

The action by the Fed came as a welcome surprise to Wall Street, which had been convinced that the Fed was unwilling to lower rates further.

Stock prices rose moderately after the Fed’s announcement, but the dollar plummeted against the German mark, a day after reaching its highest level in nearly 17 months. The Dow Jones industrial average ended 10.89 points higher at 2,887.87 on the New York Stock Exchange. The dollar closed Tuesday at 1.7080 marks, down from 1.7510 marks the previous session.

The Fed action came as fresh statistics published Monday showed that factory orders plunged in March for the fifth consecutive month, and consumer confidence began to decline again as the euphoria that followed the end of the Gulf War began to ebb.

Commerce Department figures showed that factory orders plunged 2.8% over the month, after a decline of 0.6% in February, mainly as a result of a falloff in demand for big-ticket items such as autos and refrigerators. Analysts say the fall could spark additional unemployment.

Meanwhile, the Conference Board, a private research group, said its consumer confidence index, considered an indicator of future economic trends, slipped during April to 79.2% of its 1985 average, from 81.1% in March. The index hit a low of 55.1% in January on fear of impending war.

Fed officials said the decision to lower the key interest rates was based largely on fresh evidence that the economy was not rebounding as quickly as Fed Chairman Alan Greenspan and other officials at the central bank had expected.

“My position has been that the recession should end in midsummer, but I felt there were still risks to that forecast,” said Robert P. Forrestal, president of the Federal Reserve Bank of Atlanta, who participated in the decision-making.

At the same time, lower consumer and wholesale prices in recent months have led Fed officials to believe that they can move more aggressively to lower interest rates without reigniting inflation.

But, in addition to the signs that the recession is continuing, senior Administration and Fed officials said Tuesday that the Fed’s action was also partly in response to White House pressure.

During a meeting of finance ministers and central bankers of the major industrial nations in Washington on Sunday, the Bush Administration campaigned hard to persuade Germany and Japan to join the United States in lowering interest rates to avert a global recession.

At the same time, White House officials were pressuring the Fed, publicly and privately, to cut interest rates as well. Although Japan and Germany balked, Fed officials, who had apparently been considering a rate cut for some time, moved on their own.

“I think they moved a few days earlier than they would have otherwise” because of the White House pressure, one senior Administration official said. “But they were going to do this anyway.”

Meanwhile, senior Fed officials said Greenspan took steps to consult more closely with other Fed leaders Tuesday morning before announcing the rate cut, as part of an effort to end an internal dispute.

Several Fed officials, including a number of the presidents of the Fed’s 12 district banks, earlier had been upset that Greenspan had moved aggressively through the early spring to reduce rates on his own. They contended that their influence over monetary policy was being reduced.

Tuesday’s move still met with some resistance within the Fed. Wayne Angell, a member of the Fed’s board of governors, dissented from the board’s decision to cut the discount rate, apparently arguing that the Fed had already eased enough over the last few months.

Forrestal of Atlanta, by contrast, has been the Fed’s most outspoken proponent of lower interest rates over the last few months.

In recent weeks, many analysts thought that Forrestal was alone among senior Fed officials in believing that monetary policy was still too tight, but Tuesday’s actions suggest that Greenspan, who closely scrutinizes economic data, now agrees with him.

FEDERAL RESERVE DISCOUNT RATE 1986: 7.5% 1991: 5.5%