Fed Cuts Rate Yet Again

Once again this year, The Federal Reserve has attempted to stimulate the economy with a cut in its benchmark interest rate. The half-percentage point reduction, to 2.5 percent, represents a 39-year low for the target rate on overnight loans among banks.

The Fed also cut its discount rate on loans to banks from the Federal Reserve system to 2 percent from 2.5 percent.

It was the second half-point rate cut by the Fed since September 11, and the ninth time the Fed has cut rates this year. The reduction of four percentage points in the federal funds rate in nine months, from 6.5 percent at the beginning of the year, is the most aggressive cutting of official interest rates since 1985 and one of the most pronounced on record.

“The terrorist attacks have significantly heightened uncertainty in an economy that was already weak,” the Fed said in the statement announcing its decision. “Business and household spending as a consequence are being further damped.”

The Fed said the economy's underlying strengths should become apparent again once the “unusual forces” set in motion by the attacks begin to recede. But the statement was said to offer little in the way of immediate reassurance, and signaled that the Fed was likely to cut rates further in coming months.

Stock prices fell slightly after the Fed announced the rate cut around 2:15 Tuesday afternoon, then rose. The Dow Jones industrial average finished at 8,950.59, up 113.76 points for the day. Banks immediately began cutting their prime lending rate from 6 to 5.5 percent, a step that will translate into lower rates on some home equity, automobile, credit card and small- business loans. At the same time, though, rates paid on savings accounts have also fallen to their lowest levels in years, cutting into the returns earned by many retirees.

The federal funds rate is now approaching, or by some measures passing, the point where it is lower than inflation, a threshold the Fed usually crosses only during recessions. The so-called “core personal consumption deflator” — the measure of inflation most often cited by Fed chairman Alan Greenspan — is running at a 1.6 percent annual rate, still lower than the federal funds rate. The better-known core Consumer Price Index is running at a 2.7 percent annual rate.

With rates already low and both businesses and consumers nervous about the outlook, analysts said the Fed's move would probably not lead to any immediate increase in spending and investment. But they said it would help ease the financial strain on households and corporate balance sheets as the economy goes through tough times. The economy all but stalled during the spring. Economists said it almost certainly fell during the third quarter and would probably shrink again in the fourth quarter, which began on Monday. The most commonly used definition of a recession is two consecutive quarters in which economic output falls.