Fed makes surprise half-point percentage cut in interest rates

The Associated Press

WASHINGTON - The Federal Reserve on yesterday reduced a key interest rate by one-half of a percentage point as the central bank tries to keep America's stop-and-go recovery from stalling amid rising worries about a war with Iraq.

Commercial banks were expected to respond by moving a benchmark consumer rate to its lowest point since 1959.

The Fed moved the federal funds rate from its already low 1.75 percent, where it had stood for 11 months, to 1.25 percent, surprising many analysts who had forecast a quarter-point move. They believed the Fed would want to conserve its power to aid the economy, given the bank's aggressive cuts last year that left it with little room to lower rates.

But analysts said the Fed apparently has grown so concerned about the weakening economy that it decided on bold action. In recent weeks, economic reports have shown unemployment rising to 5.7 percent, the manufacturing sector stumbling further and consumer confidence hitting a nine-year low.

Wall Street had climbed to its highest level in two months in anticipation of a Fed rate and finished yesterday with the Dow Jones industrial average gaining 92.74 points to close at 8,771.01.

The rate cut came on a 12-0 vote of the central bank's policy setting Federal Open Market Committee. At its last meeting in September, the Fed had a rare double dissent as two members argued that the economic dangers were sufficient to warrant a move then.

In 2001, the Fed cut rates 11 times, including eight half-point reductions, as it fought a recession and the economic fallout from the terrorist attacks against the United States, pushing the funds rate to 1.75 percent, the lowest level since it stood at 1.17 percent in July 1961.

In a one-page statement explaining yesterday's move, the Fed said it believed recent signs of a faltering economy demanded further action.