The Federal Reserve shaved a quarter of a percentage point from its chief signal-sending interest rate Wednesday, driving the rate to a seven-year low of 3.75% in an effort to keep a stubbornly sluggish economy from slipping into recession.
The central bank's Federal Open Market Committee coupled the cut with a statement signaling it is ready to reduce rates further if economic troubles worsen. But both the action and the words seemed considerably less emphatic than in past months, suggesting uncertainty about how much more is needed to spark a recovery.
The latest cut was the sixth this year, but the first of only a quarter point, the smallest increment by which the Fed moves. All the others have been half a point.
The central bank's tentativeness brought mild rebuke from some quarters. "The Fed risks at least the perception that it's falling behind the curve again," said David M. Jones, chief economist of the New York bond house of Aubrey G. Lanston & Co.
Other analysts said Fed policymakers appeared convinced that the economy was on the mend and did not want to risk fueling inflation by cutting rates too much.
"There's no sense cramming monetary medicine down our throats indefinitely," said Edward E. Leamer, a UCLA economist and director of the school's Anderson business forecast. "It's time to wait and see if what they have already given us works."
Investors appeared confused by the Fed action and sent stock prices wobbling up and down in trading after the decision. The Dow Jones industrial average lost 37.64 points, or 0.4%, to 10,434.84. But the tech-heavy Nasdaq composite index climbed 10.12, or 0.5%, to 2,074.74.
In parts of its statement, the Fed continued to paint a dark picture of the nation's economic condition: "Declining profitability and business capital spending, weak expansion of consumption and slowing growth abroad continue to weigh on the economy."
But the central bank appeared to go out of its way to highlight some economic strengths as well. And in a change from recent statements, it made no mention of a readiness to slash rates between policymaking meetings if conditions deteriorate. The next open market committee meeting is Aug. 21.
Analysts said the Fed's decision to take a wait-and-see stance on further rate reductions was prompted at least in part by the recent passage of President Bush's $1.35-trillion tax cut. Tax refund checks are due to begin arriving at Americans' homes next month and could help the economy by spurring additional consumption.
"If the tax cuts get spent instead of stashed away and saved, then there is less need for monetary stimulus," said Neal Soss, chief economist of Credit Suisse First Boston Corp. in New York.
The decision to throttle back on the pace of rate cuts also may have been the product of disagreement among policymakers. Going into Wednesday's meeting, Fed Chairman Alan Greenspan was widely thought to be interested in continuing the central bank's rapid-fire rate reductions, while others, including Laurence H. Meyer, was concerned that too much cutting could rekindle inflation. Analysts said the quarter-point reduction might have been a compromise.
The Fed's resolve to move at a slower pace could be severely tested as early as next week when the government announces the June unemployment rate, which is expected to climb one-fifth of a point to 4.6%.
The jobless rate has risen at an unexpectedly slow pace in recent months, which analysts say explains why consumers have remained generally optimistic despite the economy's stumble.
"If unemployment starts to climb quickly, you can be sure the Fed will go back to big rate cuts," predicted Leamer, the UCLA economist.
Wednesday's modest action notwithstanding, the Fed has moved with spectacular swiftness in slashing rates this year. It has driven the so-called fed funds rate, the interest that banks charge each other for short-term loans, from 6.5% to 3.75% since January in what amounts to the steepest program of rate cuts in almost two decades.
Banks and other financial institutions take their cue from the funds rate. Within minutes of Wednesday's Fed decision, Bank of America and Bank One said they would trim the prime rate they charge their best business customers to 6.75% from 7%, the lowest since 1994.
The Fed has acted with such speed because Greenspan and other central bank leaders believe they are dealing with a slowdown that's fundamentally different from most, if not all, other downturns of the modern era.
In virtually every other case, the economy's problems started with a slowdown by American consumers. That provoked companies to slash production and lay off workers, which resulted in still slower consumption and a downward economic spiral.
But this time around, corporate America appears to have lost its nerve largely on its own and has begun cutting back despite the continued willingness of households to spend.
Analysts trace the mirror-image downturn to an unusual double whammy that has hit the corporate sector. Companies, especially in high-tech, invested vast sums in new plants and equipment only to discover they had produced a capacity glut.
Firms have reacted by cutting back sharply. Although most of the focus has been on capital spending cutbacks, recent reports suggest that the slashing is occurring across the board.
The airline industry reported that its revenue plummeted almost 12% in May, the worst drop in more than two decades. It traced the decline to business travel cutbacks. The hotel industry reported similar declines as major firms slash travel budgets by up to half.
The Fed has sought to encourage the corporate sector to go back to investing and expanding by cutting rates sharply. It also has sought to keep consumers buying in order to ensure a market for companies' goods. And it has met with some success on both counts. Home sales have remained robust despite the economic slowdown, and corporate borrowing, which came to a near-standstill late last fall, has resumed.
"The money is flowing again," said David D. Hale, chief global economist for Zurich Finanical Services Group in Chicago.
But analysts warn that Fed interest rate cuts may prove less effective at convincing corporate America than American consumers to go back to buying.
One indicator: By some measures, the Fed's latest rate cut has pushed the after-inflation cost of taking out a loan to near zero. Analysts said that in most circumstances, such a situation should touch off a corporate borrowing boom, but it so far has not.
"This is not a garden-variety recession, which is what the Fed originally thought it was," said Allan Sinai, chief global economist for Decision Economics, a consulting firm. "It's going to take more than garden-variety rate cuts to end it."