Citing its worry that the worst of the economic slowdown may yet be ahead of us, the Federal Reserve reduced its benchmark interest rate a half-point, to 4 percent. It was the fifth time in the first four-and-a-half months of 2001 that the rate was trimmed, and the central bank hinted it was likely to ease monetary policy further yet at its scheduled meeting in late June.
The Fed said its decision was driven by the recent flattening of consumer consumption and housing expenditures, and a decline in capital equipment investments. “The erosion in current and prospective profitability” said the statement, “in combination with considerable uncertainty about the business outlook, seems likely to hold down capital spending going forward. This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slow growth abroad, continues to weigh on the economy.” It said that reducing the cost of borrowing to consumers would be an effort to bolster retail sales. (Within minutes of the Fed announcement, banks began reducing their prime interest rates from 7.5 percent to 7 percent.)
Retail sales rose in April, and retailers said they were bringing their inventories of unsold goods into line with the reduced demand. But 223,000 jobs were also lost during the month, the biggest downturn in more than a decade, and the unemployment rate rose to 4.5 percent, raising the specter of consumer demand dropping even further.
Economists noted that the risk of “overstimulating” the economy could create an inflation problem, but that the Fed seems certain the path to containing inflation is through productivity. The Dow Jones Industrial Average jumped slightly after the 2:15 p.m. announcement on Tuesday, but ended the day down 4.36 points. Nasdaq rose 3.66 points.