The Federal Reserve slashed U.S. interest rates on Wednesday in a surprise move that reflected its evident concern that businesses were cutting spending so steeply that the economy was at risk of falling into recession.
For a second time this year, the U.S. central bank delighted financial markets by aggressively cutting rates between regularly scheduled meetings of its policysetting Federal Open Market Committee.
In the statement that followed the relatively rare step, the Fed served notice it was ready to cut rates again if needed, saying risks to the economy remained tilted toward weakness. The Fed's next scheduled FOMC meeting is on May 15.
The latest Fed action, taken after an early morning conference call between Fed Chairman Alan Greenspan and other FOMC members, brings the federal funds overnight bank lending rate down to 4.5 percent - its lowest level in more than 6-1/2 years. That was just before the Fed raised the fed funds rate to 4.75 percent in August 1994.
The more symbolic discount rate on Fed loans to banks will fall to 4.0 percent.
STOCK MARKETS ROCKET HIGHER
Stock markets, already in positive territory before the move, soared on the news that borrowing and investment costs would fall. The Dow Jones industrial average was ahead nearly 400 points at noon and the high-tech laden Nasdaq composite index was up more than 160 points.
The last time the Fed changed rates between scheduled meetings of its policymaking FOMC was on January 3. It has cut interest rates four times this year, for a total of two full percentage points.
In the statement explaining its decision, the Fed said progress was being made in reducing overstocked inventories and added that consumer spending and housing were holding up reasonably well.
"Nonetheless, capital investment has continued to soften and the persistent erosion in current and expected profitability, in combination with rising uncertainty about the business outlook, seems poised to dampen capital spending going forward," the Fed said.
"This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, threatens to keep the pace of economic activity unacceptably weak," it added.
Analysts hailed Fed policymakers' determination to head off a recession in the world's largest economy.
FED SHOWS ITS DETERMINATION
"The Fed is underscoring a point," said economist Diane Swonk of Bank One Corp. in Chicago. "They are going to take whatever action is necessary to make sure the ship doesn't sink."
Earlier on Wednesday, the Commerce Department issued the February trade report that showed a record falloff in the dollar value of imports of consumer and capital goods. The overall monthly deficit declined to $26.99 billion from $33.25 billion in January, largely because companies were importing less amid waning consumer demand and high inventories.
Drew Matus, an economist at Lehman Brothers in New York, said it was notable that the Fed expressed worry that a decline in equity wealth because of past stock market declines might dampen spending in future.
"But they do also talk about capital spending so someone could make a reasonable argument that they cut on the trade number," Matus added.
The completely unexpected move highlights growing concern at the U.S. central bank about the rapidity with which the economy is losing steam.
"It's proportional to how the risks for the economy feel. This should be a very clear statement from the Fed that Greenspan is going to do what it takes to help the economy," said Jim Glassman, economist at J.P. Morgan.