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Fed drops rates another
50 basis points
By • Bankrate.com
Federal
Reserve Board officials slashed interest rates by one-half of a
percentage point for the third time in three months on March 20,
warning that a slowdown in manufacturing, falling stock prices and
tight corporate profit margins were hampering economic growth.
While the 50 basis point move was smaller than
some market watchers hoped for, Fed officials said in a post-meeting
statement that they would closely monitor the economy for signs
of further deterioration. That suggests further rate cuts could
come at the agency's next policy setting meeting on May 15 -- or
sooner.
"Although current developments do not appear
to have materially diminished the prospects for long-term growth
in productivity, excess productive capacity has emerged recently,"
the statement said. "The possibility that this excess could continue
for some time and the potential for weakness in global economic
conditions suggest substantial risks that demand and production
could remain soft.
"In these circumstances, when the economic situation
could be evolving rapidly, the Federal Reserve will need to monitor
developments closely."
Tuesday's meeting was only the second of eight
scheduled this year for the Fed's Federal Open Market Committee.
The group, which sets interest rate policy for the full board, voted
to lower the federal funds rate to 5 percent from 5.5 percent and
the federal discount rate to 4.5 percent from 5 percent. The most
recent cut comes on the heels of two 50-point reductions in January.
Cumulatively, policymakers have reversed all but 25 basis points
of the hikes they pushed through in 1999 and 2000 to ward off inflation.
The benchmark federal funds rate guides the
private-market rates banks charge on everything from home equity
loans to credit cards, as well as the rates they pay out on certificates
of deposit. Because of the most recent Fed cut, borrowers will be
able to get even cheaper loans, but savers won't earn as much on
their CDs and money market account balances.
Rates will likely fall further, too.
Consider that the Fed includes one of three
sentences in its post-meeting statements: One says inflation is
the primary threat to the economy, one says excessive weakness is
the main problem and one says things are just right.
On March 20, the Fed used the direst of the
three, saying it "continues to believe that against the background
of its long-run goals of price stability and sustainable economic
growth and of the information currently available, the risks are
weighted mainly toward conditions that may generate economic weakness
in the foreseeable future."
"Mr. Greenspan is going to wait and see how
economic conditions play out in the future, but he certainly left
the way open for an inter-meeting cut if they need to," says Bob
Baur, managing director of economics and analytics at Invista Capital
Management in Des Moines, Iowa. He's "clearly looking out for more
weakness."
Business investment remains weak, the stock
market is doing poorly and manufacturing activity has slowed substantially,
Baur says. That suggests the Fed will cut rates further.
On the other hand, the unemployment rate hasn't
shot up and consumer spending on big-ticket items, such as cars
and houses, seems to be holding up fairly well even though confidence
has fallen. While that doesn't preclude the Fed from cutting further,
it may keep officials from slashing rates in the dramatic fashion
they have so far this year.
"Alan Greenspan is still the master of gradualism,"
Baur says. "Alan is going to continue to watch the economy and monitor
economic conditions, but I think he's confident, at least at the
moment, that the economy has not moved into recession."
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