Fed Acts to Push Interest Rates Lower
WASHINGTON (AP) _ The Federal Reserve acted on Friday to push interest rates lower, just hours after the government’s unemployment report showed the recession deepened in February as nearly a half million people joined the jobless ranks.
The central bank added extra reserves to the banking system in a move that was widely interpreted by economists as a signal that the central bank had embarked on another round of credit easing.
Economists said they believed the Fed’s new target for a key interest rate, the federal funds rate, was 6 percent, down 0.25 percent from the old target.
The federal funds rate, the interest that banks charge each other for overnight loans, is an important bellwether of Fed intentions. The Fed can control the rate by either adding or draining cash from the banking system.
″We thought the funds rate would have to be nudged down a little more to get us out of this recession, but we were surprised that they acted as quickly as they did,″ said Dana Sorrentino, an economist at Citibank.
If analysts are correct that the Fed’s new target for the funds rate is 6 percent, it would mark the seventh time the central bank has reduced this rate since late October, when it stood at 8 percent.
The funds rate was cut to 6.25 percent from 6.75 percent on Feb. 1, as the central bank reacted to a weak January unemployment report. On the same day, the Fed also cut its discount rate from 6.5 percent down to 6 percent.
A cut in the discount rate, the interest that the Fed charges to make direct bank loans, is the most dramatic signal the central bank can send of its intention to fight economic weakness with easier credit.
The Fed easing has prompted many major banks to cut their benchmark prime lending rate from 10 percent down to 9 percent and has helped to fuel similar cuts in a variety of consumer and business loan rates.
Friday’s move by the Fed to add bank reserves came after the Labor Department reported that the unemployment rate jumped to a four-year high of 6.5 percent as 450,000 persons lost their jobs, the biggest one-month in job losses since September 1982.
Many economists had not been looking for a further cut in interest rates on the part of the Fed, believing that the central bank would hold policy steady and see whether consumer confidence and spending rebounds in March now that the Persian Gulf War is over.
However, analysts said the widespread weakness in the jobless data apparently convinced the central bank to make another small easing move rather than wait to see if the economy picks up in March.
They said that the Fed’s timing may have been influenced by the Bush administration, which is continuing to pressure the central bank to move more aggressively to combat the recession.
In a speech in Hartford, Conn., on Friday, Treasury Secretary Nicholas Brady said, ″There is plenty of room in the economy for lower interest rates and we continue to hope that that will be the case.″
The Bush administration is forecasting that the recession will be short and mild with an upturn beginning in the April-June quarter.
Brady said the end of the Persian Gulf War won’t ″solve all our problems, but it will have a material effect on consumer confidence. Basically, the American people are optimistic and so am I.″
Federal Reserve Chairman Alan Greenspan said earlier this week that he too was optimistic that the end of the war would help produce a rebound in short order although he conceded that this remained a forecast since all available data continued to show the economy contracting.
Allen Sinai, chief economist of the Boston Co., predicted the Fed would cut interest rates further in coming months.
″My belief is that the central bank will be disappointed in the performance of the economy and will have to ease more to produce a revival,″ he said.