US interest rates at 45-year low
The US Federal Reserve, still striving to coax the struggling economy to stronger growth, cut a key interest rate to its lowest level since the 1950s.
While Fed Chairman Alan Greenspan and his colleagues repeated their concerns that economic weakness could trigger a destabilising fall in prices, they also noted yesterday hopeful signs that recovery from the 2001 recession may finally be picking up steam.
For that reason, many analysts said the Fed’s 13 cut in its federal funds rate could well be the last in a credit-easing campaign that began in January 2001.
At the same time, analysts said that by continuing to mention the remote threat that the country could face a period of falling prices – deflation – the Fed was signalling that it would keep interest rates down.
“The clear message is that rates are going to stay low for some time,” said David Wyss, chief economist at Standard & Poor’s in New York.
Many economists believe the combination of the lowest interest rates since the late 1950s – when Dwight Eisenhower was president – and President George W Bush’s new round of income tax cuts will finally be enough to spur stronger economic growth starting in the second half of this year but not before the unemployment rate, currently at a nine-year high of 6.1%, edges up a bit more.
The rate cut, which the Fed approved by an 11-1 vote at the end of a two-day meeting, pushed the funds rate, the interest that banks charge each other on overnight loans, from 1.25% to 1%, the lowest level since it averaged 0.68% in July 1958.
US banks were expected to respond with a similar quarter-point cut in their prime rate, moving the benchmark for millions of business and consumer loans down from 4.25% to 4%. That would be the lowest since May 1959.
With rates already so low, banks which normally sought to get ahead of the pack – by announcing their prime rate changes right after the Fed announcement - delayed those announcements until today. Stuart Hoffman, chief economist at PNC Financial Services Group of Pittsburgh, said the prime rate cuts would certainly come today or tomorrow, with many banks making the changes effective immediately.
Wall Street investors, who had hoped for a bigger, half-point rate reduction by the Fed, pushed stock prices lower after the central bank’s afternoon announcement. The Dow Jones industrial average finished the day down 98.32 points at 9,011.53.
