Fed Slashed Rates to One Percent as Economy Deteriorating

The Federal Reserve on Wednesday lowered its target for overnight federal funds rates by a half point to 1.0 percent in effort to turn around the economy hit by financial crisis. The vote to lower the Fed funds rate was unanimous. The cut marked the second half-point reduction in the funds rate this month, after the last concerted cuts by the Fed and global central banks on October 8.

The Fed has now pushed rates back to a low last reached in June 2003, more than a year after the 2001 recession ended.


At the same time, the Fed lowered the discount rate, the interest it charges to make direct loans to banks, by a half-point to 1.25 percent. The discount rate has become increasingly important as the central bank has dramatically increased direct loans to banks in an effort to break the grip of the credit crisis.

At the same time, the central bank signaled that downside risks to growth remain, indicating that more rate cuts could come. Spreading economic weakness was lowering the risks that inflation would get out of control. The weakness has caused dramatic declines in the price of oil and other commodities.

Also Wednesday, China's central bank cut interest rates for the third time in six weeks, amid a worsening growth outlook for its export-dependent economy. Japanese authorities signaled they might cut rates. And Norway's central bank cut its benchmark interest rate for the second time in two weeks. The European Central Bank and the Bank of England are expected to follow next week.

The extraordinary financial market stress over the past month has put the economy at greater risk of a recession. The aggressive efforts by the Fed to cut rates and take other actions to unfreeze credit markets will keep the country from plunging into a prolonged and deep downturn.

Lower interest rates are expected to boost economic growth, because they reduce the cost of borrowing for businesses and consumers, giving them an incentive to start new projects or spend money. Lower rates also reduce the cost of funds for banks, which theoretically should make them more willing to lend.

While benchmark interest rates have fallen, other lending rates have been slower to respond. The credit crisis has sent a wave of risk aversion through the global financial system, which has caused many banks unwilling to lend even with cheaper access to funds. Banks have tightened lending standards sharply.

Stock market trading was more subdued on Wednesday with the Dow slipping into negative territory and closing at 74.16 points lower. The Dow had staged its second biggest point surge ever on Tuesday with the Dow Jones industrial average climbing by 889 points in anticipation of the Fed's action.

Chart: online.wsj.com