The Federal Reserve Board Friday lowered two important bank lending rates in a move intended to ensure the economy's recovery from the recession.
The twin moves prompted major banks to reduce their prime rates by one-half of a percentage point to 8.0 percent. The prime is used to calculate loans to businesses and determine rates for many types of consumer loans.The Fed first announced it was dropping its benchmark discount rate to 5.0 percent from 5.5 percent, the fourth reduction since last December.
Later in the morning, although no announcement was made, the Fed was believed to have reduced the federal funds rate from 5.5 percent to 5.25 percent.
The funds rate, the interest that banks charge each other for overnight loans, also had moved down with previous discount rate cuts.
The reduction in the discount rate is the most dramatic signal the central bank can send of its intention to battle economic weakness with easier credit.
The rate is the interest the Fed charges commercial banks for loans. Such a move usually results in lower interest on other loans, including consumer credit, and thus stimulates spending and economic growth.
The move followed the announcement Friday that retail sales had fallen 0.7 percent in August, the steepest decline in seven months. At the same time, the Labor Department said consumer prices rose just 0.2 percent in August.
The vote to lower the discount rate was 4-0, with vacationing board governor Edward W. Kelley Jr. not voting. However, the Fed said later that Kelley would have approved the move. Two other positions on the seven-member are vacant.
The decline was the fourth since Dec. 18 and dropped the rate to the lowest level since February 1973, when it stood at 5 percent.