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Fed Cuts Interest Rates Again Fed Officials Hope Quarter-percent cut Will Boost Economy

By John M. Berry

Federal Reserve officials, concerned about the uncertain outlook for the U.S. economy, cut their target for short-term interest rates Tuesday afternoon by a quarter-percentage point, the seventh rate reduction this year.

The action lowered the central bank’s target for the federal funds rate, the interest rate financial institutions charge each other on overnight loans, to 3.5 percent. The rate, which influences many other interest rates including banks’ prime lending rate, is now three percentage points lower than it was on Jan. 1.

In announcing its decision, the Fed’s top policy making group, the Federal Open Market Committee, said that consumer spending has held up “but business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the U.S. economy.”

And the FOMC left the door open to more rate cuts by saying that while “long-term prospects for productivity growth and the economy remain favorable,” the committee believes on the basis “of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.”

Despite the lengthy, aggressive series of rate cuts, there is little sign that rate reductions have had a significant impact on the economy, which is growing very slowly if at all. However, there is usually a substantial lag between the time rates are lowered and a pickup in growth, and many forecasters and policy makers expect such a pickup before the end of the year. The personal income tax rebate checks now reaching consumers and a large decline in energy prices should also help get the economy moving upward again, they say. “What the Fed does from here is conditional on the economy and on the Fed’s perception of the speed of the eventual pickup they see coming,” said Mickey Levy, chief economist for Bank of America in New York. “I think the Fed is close to the end now.”

But Levy doesn’t rule out further action by the FOMC whose next policy making sessions are scheduled for Oct. 2 and Nov. 6. At Stone & McCarthy, a financial markets research firm, analyst Ken Kim said, “We don’t believe the Fed is finished with its easings this year. We look for additional (rate cuts) and we envision a 3 percent fed funds rate target by the end of the year.” In a separate action, the Federal Reserve Board reduced the central bank’s discount rate, the interest rate financial institutions pay when they borrow money from one of the 12 regional Federal Reserve banks, to 3 percent from 3.25 percent.