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Fed Trims Interest Rates for 3rd Time

Economy: Quarter-point move aims to protect growth amid global weakness. However, policymakers hint they won't act again soon.

November 18, 1998|JONATHAN PETERSON | TIMES STAFF WRITER

WASHINGTON — The Federal Reserve pushed down interest rates Tuesday for the third time since late September in a bid to foster economic growth and shelter the United States from "unusual strains" in financial markets.

At the same time, Fed policymakers hinted that they are increasingly wary of reducing interest rates further in the near future.

Following the Fed's quarter-point cut in two short-term rates, major banks began to lower key interest rates affecting credit cards and auto loans, a shift that could stimulate consumer spending on a range of goods in the holiday season and beyond.

The Fed action put the federal funds rate, which banks charge one another for overnight loans, at 4.75%, the lowest level in four years and three-quarters of a point lower than when the Alan Greenspan-led Fed embarked on its campaign of rate cuts. Officials also lowered the discount rate, which the Fed charges on loans to banks, to 4.50%.

"The Fed's decision to lower rates was made at the right time and for the right reasons--namely to stimulate growth in our country and curtail recession throughout the emerging economies," said Jerry Jasinowski, president of the National Assn. of Manufacturers.

"Continued interest rate reductions are needed to prevent a slowing U.S. economy from slipping into recession and the U.S. stock market from experiencing a serious downdraft," he added.

While widely expected, Tuesday's action underscored the powerful, opposing pressures that are buffeting the U.S. economy and challenging its policymakers.

Consumers continue to spend robustly--a factor that argues against interest rate cuts--even as the manufacturing sector is slammed by global woes.

Adding to the confusion, the recent gut-wrenching plunges in global financial markets have halted, yet they have left a residue of extreme skittishness.

Meanwhile, there has been little evidence of emerging inflation, making it easier for the Fed to lower rates. On Tuesday, just before the Fed's policy-setting committee went into closed-door session, the Labor Department reported that consumer prices rose a modest 0.2% in October. That brings inflation year-to-date to an annualized rate of 1.6%.

In their statement Tuesday, Fed officials highlighted the fragility that continues to plague global financial markets.

But they also signaled that further interest rate cuts are not a sure thing and that rates may be near an agreed-on, noninflationary level. The Fed's policymaking Open Market Committee is next scheduled to meet Dec. 22.

"Although conditions in financial markets have settled down materially since mid-October, unusual strains remain," the Fed said.

Now that short-term rates have been slashed by three-quarters of a point, it continued, "financial conditions can reasonably be expected to be consistent with fostering sustained economic expansion while keeping inflationary pressures subdued."

Tuesday's cuts are just the latest in an extraordinary series of Fed policy moves. As recently as last summer, Fed officials were cool to rate cuts, viewing inflation as their main foe. In mid-August, however, Russia's botched devaluation of the ruble set off a furious round of financial turmoil.

By late September, the Fed reversed its stance and enacted the first interest rate cut in more than two years out of concern that financial mayhem might sabotage America's economic expansion.

It then followed the September cut--which disappointed financial markets because it was only a quarter-point--with a surprise move in October that transformed investors' glum psychology.

Since then, the Dow Jones industrial average has gained more than 1,500 points, nearly wiping out the losses it incurred since its July peak. The market's reaction to the latest cut was muted, however.

The Fed announcement immediately drove the Dow from a 60-point loss into positive territory, but the index finally closed down 24.97 points at 8,986.28.

Behind the obscure language in Tuesday's Fed declaration lurks an unusually complex problem of sorting out the varied signs of strength and vulnerability in the U.S. economy, along with ongoing questions about the stability of financial markets here and abroad.

Inside the Fed, these varied concerns leave some officials more focused on a possible downturn and others worried about inflation.

"I think a deal was struck to allow one more cut in the federal funds rate," said Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson, an investment bank in Chicago. But looking ahead, it would keep rates "in a semi-permanent holding pattern."

Although the majority of economists expected Tuesday's rate cuts, some have started to argue that improved conditions no longer justify lower rates and that the cuts might push the stock market to untenable levels.

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