WASHINGTON -- The Federal Reserve is sending a strong signal that it stands ready to do whatever is necessary to keep the economy from falling into recession. That could include another interest rate cut before the Fed's next meeting in two months.
Fed Chairman Alan Greenspan and his colleagues slashed a key interest rate again Tuesday, the third half-point reduction this year, in an effort to keep the ailing economy afloat.
In doing so, the Fed worried about "substantial risks" of prolonged economic weakness. Specifically it said production cuts by manufacturers could continue for some time and that weak economies around the world could become a further drag on U.S. growth.
Economists believe the remarks hinted at the possibility of a fourth interest rate cut before the Fed's next scheduled meeting May 15, perhaps in a few weeks.
Fed policy-makers pledged to keep a close eye on the economy between now and then. "In these circumstances, when the economic situation could be evolving rapidly, the Federal Reserve will need to monitor developments closely," the statement said.
That gave no comfort to Wall Street investors, who had hoped the central bank would cut rates by three-quarters of a point rather than one-half. Stocks closed sharply lower Tuesday.
The Fed's latest half-point cut lowered the target for the federal funds rate, the interest that banks charge each other, to 5 percent, after half-point cuts on Jan. 3 and Jan. 31.
The 1.50-percentage-point cuts since the beginning of the year marked the Fed's most aggressive rate-reduction effort in 16 years, since the Fed under Paul Volcker as chairman slashed rates by 1.75 percentage points in the last two months of 1984.
Still, it will take a while for the rates cuts to work their way through the economy and show up as economic activity. That process can take up to a year, analysts said.
Many economists forecast the funds rate will be cut as many as three more times by the summer, dropping it to 4 percent.
The half-point cut Tuesday was followed immediately by announcements from banks around the country of reductions of a corresponding half-point in prime lending rates, benchmarks for millions of consumer and business loans, to 8 percent, the lowest the prime rate has been since August 1999.
That means different types of loans that are linked to the prime will see rates go down, such as some auto loans, home equity loans, credit cards, student loans and short-term business loans.
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