Fed Apparently OKs Dip in Key Interest Rate

The Federal Reserve, worried about the continued sluggishness in the economy, apparently gave its blessing to another small drop in interest rates Wednesday in hopes of jump-starting the flagging recovery, Wall Street analysts said.

Market-watchers said that the Fed intentionally did not intervene when the federal funds rate--the interest that banks charge one another on overnight loans--fell to 5% Wednesday from 5.25%, perhaps signaling a new round of interest rate reductions.

Some analysts now believe that the central bank may also slash its discount rate--the interest that the Fed charges on short-term loans to member banks--on Friday, when the Labor Department is scheduled to publish its report on the unemployment rate for October.

Fed Chairman Alan Greenspan had told a business group in Rhode Island on Monday that the economy is not growing as robustly as it should at this stage of a recovery. His remarks were widely interpreted as signaling that interest rates would be further eased.

Meanwhile, the Commerce Department published fresh statistics showing that, during September, sales of new homes took their sharpest plunge in 2 1/2 years, adding to apprehension that the recovery is faltering.

The department reported that home sales fell 12.9% over the month to a seasonally adjusted annual rate of 446,000. The decline was apparent in virtually every major section of the country, with a 16.9% drop in the West, the region that was hit hardest.

Both the Bush Administration and Congress have expressed new concern about the continued sluggishness in the economy, with the White House departing from its traditional optimism to concede that the pace of the recovery is now uncomfortably slow.

President Bush met with his top economic advisers Wednesday after his return from the U.S.-Soviet summit meeting and Middle East peace conference in Madrid, but there was no indication that he had decided on any new measures.

Bush and his advisers had hinted earlier that they might be considering a new tax-cut package to help stimulate the economy. But, in the last several days, the President appears to have had some second thoughts, apparently fearing that the action would bloat the budget deficit.

The Administration has continued to pressure the Fed to push interest rates down. Before Wednesday, the Fed has directly or indirectly nudged the federal funds rate down 11 times since the recession began in July, 1990.

Even with the Fed’s apparent blessing for the drop in the federal funds rate Wednesday, there were some analysts who insisted that the decline was more a technical correction than a signal by the Fed of a new round of interest rate reductions.

But other analysts stated adamantly that the Fed’s apparent decision not to intervene in the credit markets was intended to give the central bank’s imprimatur to a further reduction in interest rates.

Allen Sinai, economist for the Boston Co. in New York, said that everything adds up to another easing by the Fed.

“I may be in the minority on this,” he said, “but I think there was an 80% chance they eased--especially in the context of what Greenspan said, of the weakening economy and of persistently low inflation.”

The Fed never comments on changes in the federal funds rate.

Along with the grim figures on new home sales, the government published economic reports showing that consumer spending rose by a respectable 0.9% in September, confirming earlier figures suggesting that there was a modest economic surge during the summer.

But the plunge in home sales, which dashed any hopes for a recovery in the nation’s battered residential real estate markets, indicated to some analysts that the summer spurt may have been short-lived.

Bruce Steinberg, a market analyst at Merrill Lynch, the New York securities firm, speculated that the Fed probably acted “deliberately” Wednesday in allowing the federal funds rate to drop and that it probably will slash its key discount rate soon as well.

“Given Greenspan’s remarks Monday, the most pessimistic remarks I’ve seen from him, you have to think the possibility of a discount rate cut is very high,” Steinberg said. “The Fed has to be very worried now.”

The Fed moved overtly to cut the discount rate in mid-September to 5% from 5.5%. At the time, however, many analysts said that they believed Greenspan’s yearlong campaign to ease rates probably had run its course.

Analysts said that a weak jobs report on Friday--together with lackluster growth in the number of new jobs that the economy creates--could force action on the discount rate soon, possibly pushing it down to 4.5%, which would be the lowest level in almost 20 years.

Others speculated that the Fed may not act until next Tuesday, when the central bank’s policy-making Federal Open Market Committee is scheduled to meet to review the economic situation.

Sinai added: “There are plausible explanations for everything they did. But I find it hard to believe the central bank is not in the process of easing (interest rates). If not, they are making a big mistake, for which we will all pay.”