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US Federal Reserve Chops Interest Rates to 5.5%
Moving aggressively for the second time in a month to shore up a weakening economy, the Federal Reserve cut its target for short-term interest rates by a half point on Wednesday.
The move matched the surprise half-point cut it made Jan. 3, meaning the Fed has cut rates by a full percentage point in less than a month. Though the rate cut was broadly expected, it was dramatic: Since Alan Greenspan became chairman in 1987, the Fed has cut rates this deeply only once before, in December 1991, when policymakers feared the economy might be slipping back into a recession that had just recently ended.
In making the half-point cut, the Fed cited a litany of bad news: continued erosion in consumer and business confidence, rising energy costs, slowing retail sales, weak business spending on capital equipment and a sharp cutback in factory activity.
Wednesday's reduction dropped the Fed target for the rate banks charge each other for overnight loans to 5.5%, where it was in February 2000. Major banks quickly followed the Fed's lead by lowering the prime rate to 8.5% from 9.0%. The prime rate is used to set credit card rates and other consumer loans. By lowering borrowing costs, the Fed aims to spur business investment and consumer spending, which would in turn boost economic growth.
January's two rate cuts were prompted by signs that the Fed has gotten much more than it bargained for when it began raising interest rates to slow the economy and head off inflation back in June 1999.
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