Fed reduces US rates to 5 pc, ready for more

Fed reduces US rates to 5 pc, ready for more
REUTERS

WASHINGTON, MAR 20: The Federal Reserve on Tuesday cut US interest rates by half a percentage point, the third such reduction this year, and signaled strongly it stood ready to act again at any time if needed. But the size of the cut in borrowing costs disappointed financial markets. Stocks were sold off sharply as the Fed dashed hopes for a three-quarter point reduction, despite what analysts said was a signal that a move between scheduled meetings was possible.

“In these circumstances, when the economic situation could be evolving rapidly, the Federal Reserve will need to monitor developments closely,” policymakers said in a statement issued at the end of the Federal Open Market Committee session. Some analysts said the emphasis on monitoring the situation closely - which echoed wording in the Fed’s Dec 19 statement before an inter-meeting rate cut Jan 3 - suggested the central bank was open to lowering rates again ahead of its next scheduled meeting on May 15.

“That’s code for saying, ‘we’re not necessarily going to wait until the May 15th regularly scheduled meeting,’” said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh, Pa. Tuesday’s move followed two rapid-fire cuts in January. This drops the bellwether federal funds overnight bank lending rate to 5 per cent - its lowest level since mid-1999. Still, the decision to opt for a half-percentage-point cut, instead of a more dramatic three-quarter-point cut financial markets had hoped for, triggered heavy selling on Wall Street.

INVESTORS SHOW THEIR UNHAPPINESS: The Dow Jones industrial average closed down 239 points at 9,720, its lowest since March 24, 1999. The tech-laden Nasdaq composite index plunged 4.8 per cent to hit its lowest point since Nov 13, 1998. Equity markets were pummeled last week but hopes for a bold rate cut sparked an upturn on Monday. Some lawmakers were also upset the Fed did not take borrowing costs down further. “It should have been more,” Senate Finance Committee Chairman Charles Grassley of Iowa said. “I was hoping for three-quarters.” The Fed indicated it saw the risks to the US economy from excess capacity at home and weak conditions globally. However, it also said inventories were being sold off rapidly and consumer spending was holding up. To underscore its resolve to keep recession at bay, board members of the powerful central bank voted unanimously to also cut the discount rate charged on direct Fed loans to commercial banks by half a point to 4.5 percent.

Several banks swiftly cut prime lending rates, given to their best corporate customers, to 8 percent from 8.5 per cent. In a statement after the meeting, the Fed said it still sees excessive weakness as the main threat to the economy. This showed its determination to keep cutting rates if necessary to keep the record economic expansion from stalling out. “Persistent pressures on profit margins are restraining investment spending and, through declines in equity wealth, consumption,” the Fed said. It added that the possibility of weakness in global economic conditions meant that “demand and production could remain soft” for some time.

STILL HOPING FOR MORE CUTS: Analysts said the strongly worded statement was reassuring, even if the rate move was less than markets desired. “While it was disappointing, the mere fact that they’retalking about global weakness, profit margins, excessive production buildup and things of that nature suggests they are watching things very closely,” said Anthony Chan, Chief economist at Banc One Investment Advisers. “Given the long period between March 20 and May 15, I think they are probably opening up the door and leaving it open to have another crack between now and May 15.”