Originally created 06/30/03

Latest interest rate cut could be last for a while



WASHINGTON -- The Federal Reserve's first short-term interest rate cut of this year could turn out to be its last bracing tonic if the economy's vital signs - which the Fed says already are improving - get even stronger in the coming months.

The Fed's main lever for influencing the economy's health - the federal funds rate - was lowered by a quarter percentage point Wednesday to 1 percent, a 45-year low.

The action marked the first reduction in the funds rate - the interest banks charge each other on overnight loans - since November and the 13th cut since January 2001, when the Fed's credit-easing campaign began.

"The committee judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time," Fed Chairman Alan Greenspan and his Federal Open Market Committee colleagues said in a statement.

Private economists are hopeful the economy will pick up more speed in the second half of this year, with some predicting a growth rate of around 4 percent. A new round of tax cuts signed into law by President Bush last month should help on that front, they said.

"If Fed policy-makers see signs of much better economic growth, this could well be the last interest-rate cut necessary," said Lynn Reaser, chief economist at Banc of America Capital Management.

The Fed's next meeting is Aug. 12. Reaser and other economists believe by that time, the economy will be stronger and that the Fed will hold the funds rate at its currently low level - although it wouldn't hesitate to cut the funds rate again should the economy take an unexpected turn for the worse.

Fed policy-makers seemed to strike a more positive tone than they had at their last meeting in May, economists said.

In its statement Wednesday, the Fed said there were a number of signs that the economy seemed to be firming, including gains in consumer spending, growth in payrolls and "markedly improved financial conditions," a reference to the advance in stock prices and the decline in interest rates.

"The relatively upbeat statement seems to indicate that the committee is fairly comfortable that the level of monetary and fiscal stimulus already in place, coupled with evolving trends, will generate significant growth in the next few quarters," said Joel Naroff, president of Naroff Economic Advisors.

Still, Fed policy-makers didn't abandon their concerns about the potential threat to the economy of a dangerous decline in prices. Given that, economists said the funds rate is likely to stay at 1 percent for a while or possibly nudge down again. They don't foresee the rate going up anytime soon.

With the lowering of the funds rate on Wednesday, commercial banks were expected to cut their prime lending rates - the benchmark for many consumer and business loans - by a similar quarter point, from the current rate of 4.25 percent to 4 percent, which would be the lowest level since May 1959.

Stuart Hoffman, chief economist at PNC Financial Services Group, said the prime rate cuts would probably come either Thursday or Friday.

Lower borrowing costs could spur consumers and business to spend and invest more. Businesses have been reluctant to ramp up capital spending and hiring, major factors holding back the economy's ability to return to full health.

Consumers are the main force keeping the economy going. Decades-low mortgage rates are powering home sales and feeding a refinancing frenzy. The extra cash left over from refinancing and solid home-value appreciation is helping to support consumer spending. That's helping to offset the negative forces of a sluggish job market, where unemployment is at a nine-year high of 6.1 percent.

The lone dissenting vote to the Fed's rate cut Wednesday was cast by Robert Parry, president of the San Francisco Fed, who argued for a bigger half-point move.

David Rosenberg, Merrill Lynch's chief economist, said he's sticking to his call for another quarter-point cut, probably at the Fed's Sept. 16 meeting. "It ain't over till it's over," he said. "And, we still don't believe it's over."

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