WASHINGTON -- After the Federal Reserve tried boosting the wheezing economy with an interest rate cut for the first time this year, private economists offered mixed opinions on whether more may be needed.
Federal Reserve Chairman Alan Greenspan and his colleagues on Wednesday prescribed a half-percentage point reduction to the federal funds rate, the Fed's main lever for influencing the economy. That pushed the funds rate, the interest that banks charge each other on overnight loans, to a 41-year low of 1.25 percent.
In response, some commercial banks lowered their prime lending rate -- a benchmark for many consumer loans -- by a similar half-point to 4.25 percent, the lowest rate since 1959.
By lowering short-term interest rates, Fed policy-makers hope to motivate anxious consumers to spend more and wary businesses to invest more, energizing economic growth.
"I think the Fed recognized that the consumer is getting near the end of their ropes," said economist David Jones, author of "Unlocking the Secrets of the Fed."
The Fed said Wednesday's rate reduction "should prove helpful as the economy works its way through this current soft spot."
With interest rates already at low levels all year long, some private economists wondered whether Americans would rush out on a major buying binge. But many believed the rate reduction would provide consumers and businesses with a much-needed psychological boost, reducing the odds that they would sharply cut spending and investment and throw the economy into a tailspin.
"Consumers are hanging in there, but with increasingly less conviction," said Mark Zandi, chief economist at Economy.com. "They are continuing to buy if given what they consider to be once-in-a-lifetime deals, but otherwise they are very cautious and thinking about pulling back further."
Zandi and other economists believed the bold, half-point rate reduction probably meant the Fed would stay on the sidelines for the next few months. But other economists said they thought a further reduction could come at a policy-makers' meeting either in December or January.
"If things improve and a possible war with Iraq recedes, then they may not have to cut rates again. But my guess is that we will get another quarter-point move in January," said David Wyss, chief economist at Standard & Poor's.
Many economists said that with Republicans now in control of both houses of Congress, the Bush administration is likely to move forward with extra government stimulus measures to jump-start growth.
Some economists worry that the economic recovery -- which has been advancing in fits and starts all year -- may be in danger of stalling.
On the Net:
Federal Reserve: http://www.federalreserve.gov
Brainerd Dispatch ©2013. All Rights Reserved.