Federal Reserve Lowers Discount Rate
WASHINGTON (AP) _ The Federal Reserve, struggling to bolster an extremely sluggish economy, announced today it was pushing a key bank lending rate to its lowest level in 18 years.
The decision by the Fed to lower its discount rate from 5.5 percent to 5 percent was designed to set off a chain reaction of lower interest rates throughout the economy.
Later in the morning, the Fed moved to push another key interest rate, the federal funds rate, down by 0.25 percentage point.
The Fed’s latest round of credit easing followed government reports showing that inflation remained well under control, with consumer prices rising a slight 0.2 percent in August. But in another report, the government found new evidence of pervasive weakness as retail sales plunged by 0.7 percent in August.
Within minutes of the announcement of the discount rate cut, one of the nation’s biggest banks, Morgan Guaranty, said it was cutting its prime lending rate a half percentage point to 8 percent. It was the fourth decline in the prime rate this year and put this benchmark rate for many business and consumer loans at its lowest level since 1987.
While other major banks are expected to follow suit, none did so immediately.
At mid-day, the Fed added $3 billion in reserves to the nation’s banking system in a clear signal, analysts said, that they were pushing their target for the federal funds rate down to 5.25 percent, from 5.5 percent. Unlike the actions on the discount rate, the Fed makes no official announcement of changes in the federal funds rate, the interest that banks charge each other on overnight loans.
A cut in the discount rate, the interest the central bank charges to make loans to commercial banks, is the most dramatic signal the Fed can send of its intention to push interest rates lower in an effort to spur economic activity.
It was the fourth decline in the discount rate since last December as the central bank began moving with urgency to combat the country’s first recession in nearly eight years. At 5 percent, the discount rate is now the lowest it has been since February 1973.
The Fed’s action was certain to be greeted with pleasure by the Bush administration, which ha stepped up the pressure in recent weeks for further rate cuts to spur an economy that has yet to prove conclusively that it has escaped from recession.
The Fed said the rate cut was in response to ″concerns about the ongoing strength of the economic expansion.″ It said the move was also in response to extremely sluggish growth in the nation’s money supply and weak lending by commercial banks.
The Fed said the rate cut also was taken in light of improving news on inflation. The announcement came shortly after the government released a report showing consumer prices rose just 0.2 percent in August. For the whole year, retail prices have been rising at an annual rate of just 2.7 percent, far below last year’s 6.1 percent increase.
In another report highlighting the weak economy, the government said today that retail sales fell 0.7 percent in August, the biggest setback in seven months and further evidence that weak income growth is preventing the key consumer sector from helping to revive the economy.
Overall, retail sales totaled a seasonally adjusted $152.3 billion, down from $153.4 billion in July, the Commerce Department reported. The 0.5 percent increase in July was unchanged but June’s estimated 0.1 percent gain
The Fed’s discount rate cut was taken on a 4-0 vote with Governor Edward Kelly not voting. Two other positions on the seven-member board are currently vacant.
The Labor Department said the small rise in its closely watched Consumer Price Index was identical to gains in June and July and it followed similar good news on wholesale prices released Thursday.
The 0.2 percent increase in consumer prices last month reflected outright declines in both food and energy. These decreases helped to offset higher prices for such items as fall clothing, new cars and airline tickets.
Energy prices fell 0.2 percent, reflecting declines in natural gas and residential electricity. These offset gains of 0.5 percent in gasoline pump prices and a 0.8 percent rise in home heating oil costs. It was the first advance for heating oil costs since last October.
Given the fact that gasoline costs were up more sharply at the wholesale level, analysts said gasoline prices were likely to rise even further in the current month at the retail level.
Food costs fell 0.2 percent last month following a 0.5 percent drop in July. The August decline reflected huge drops of 32.9 percent in the price of tomatoes and 15.3 percent in the cost of bananas.
Beef, pork, poultry and fish prices were also down, more than offsetting a 5.1 percent jump in egg prices.
Excluding the volatile food and energy categories, consumer prices rose 0.4 percent in August, the same increase as the previous two months.
In the non-energy and non-food categories, airline ticket prices were up 0.9 percent in August and apparel prices shot up 1.2 percent, reflecting higher prices for the new fall lines. New car prices were also up, rising 0.2 percent last month.
The overall Consumer Price Index, before adjusting for seasonal variations, stood at 136.6 last month, compared to 131.6 a year ago. That meant that a marketbasket of goods and services costing $131.60 in August 1990 would have cost $136.60 last month.