ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Thursday, February 1, 1996 TAG: 9602010036
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
DATELINE: WASHINGTON
SOURCE: Los Angeles Times
Faced with worrisome signs of a sinking economy, the Federal Reserve Board on Wednesday pushed down interest rates for the second time in two months.
The move, designed to ripple through the economy in lower consumer costs for such things as autos and houses, reduced key short-term rates by one-fourth of a percentage point.
More significantly, it was widely seen as a signal that Fed Chairman Alan Greenspan and rest of the policy-setting Open Market Committee envision further rate cuts soon.
Reaction was immediate. Major banks, led by Chase Manhattan Corp., began to lower lending rates for consumers and business by one-quarter point. The administration and its critics spun out carefully crafted statements in response. And Wall Street, scene of a feverish rally earlier this week in anticipation of falling rates, rallied a bit more.
The Dow Jones industrial average finished with a gain of almost 14 points, following its jump of more than 76 points the day before. Bonds also rallied.
``The Fed is concerned about a slowdown,'' Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis, said of Wednesday's move. ``It's not becoming a recession yet, but clearly the risks are on the downside.''
The Fed said it was reducing its highly influential federal funds rate, which banks charge each other for overnight loans, to 51/4 percent from 51/2 percent. It had been reduced in July and September. Officials also said they were lowering the discount rate, which the Fed charges on its own loans to banks, to 5 percent from 51/4 percent, a symbolic gesture that will have limited effect on the economy.
Almost instantly, Chase Manhattan and First Chicago NBD Corp. said they would lower their prime lending rates to 8.25 percent from 8.5 percent. Other major banks were expected to do the same. The prime is a benchmark rate banks set for a variety of loans.
For all the signs of a softer economy, however, some economists believed the key to the decision that came after a two-day meeting of the Fed's policymaking committee in Washington was the political calendar, as 1996 is an election year.
The Fed action amounts to a declaration that the economy needs help. It came just a week after President Clinton proclaimed in his State of the Union address that ``our economy is the healthiest it has been in three decades.''
While it is possible for a fundamentally healthy economy to slip into a temporary downturn, administration officials Wednesday seemed aware that contradictory messages could confuse the public. Clinton would like to point to a strong economy featuring robust job gains as a key accomplishment in his re-election campaign.
Republicans were quick to seize the Fed action as evidence of White House mismanagement of the economy.
Many attribute the U.S. economy's weakness to the Fed itself, which moved aggressively to raise interest rates in 1994 when concerns centered on a new outbreak of inflation and overheated growth. Interest-rate moves affect the economy with a pronounced time lag that some forecasters believe may last longer than a year.
Now, economists say the Fed could be on track to lower its funds rate at least to 5 percent and perhaps as low as 4.5 percent by mid-year.
LENGTH: Medium: 66 lines ILLUSTRATION: GRAPHIC: Chart by AP. color.by CNB