Fed Cuts Interest Rate by 1/2 Point
Reduction larger than expected; federal funds rate now 1.25 percent
November 6, 2002
WASHINGTON — In an aggressive move, the Federal Reserve on Wednesday cut interest rates by a larger-than-expected half point in a bid to ward off the chill settling over the U.S. economic recovery.
The central bank's policymaking Federal Open Market Committee decided to trim the U.S. central bank's trendsetting federal funds rate to 1.25 percent. It was the first rate cut this year -- after 11 reductions in 2001 -- and reflected clear concern the economy was losing steam.
The FOMC voted unanimously to cut interest rates.
However, policymakers signaled they would likely stand pat for now after this rate reduction, saying that risks to the economy were balanced between weakness and inflation.
The rate cut had been widely expected, but many analysts believed it would be only a smaller quarter-point move. In its statement the central bank emphasized concerns about the economic recovery amid rising worries about how a possible war with Iraq would affect consumer and business confidence.
"Incoming economic data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production and employment," the Fed said.
By lowering short-term interest rates, Fed policy-makers hope to motivate consumers to spend more and businesses to ramp up investment, something that would boost economic growth.
Some private economists question whether Wednesday's rate cut will have the desired impact given the Fed has kept borrowing costs at very low levels all year long. But other analysts believe the rate reduction will at least bolster consumer and business confidence as well as help lift spirits on Wall Street.
Commercial banks' prime lending rate -- the benchmark for many consumer and business loans -- moves in lockstep with the funds rate. As a result of the Fed's decision, many banks were expected to announce a similar half-point reduction, lowering the prime rate to 4.25 percent, which would be its lowest rate since May 1959.
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