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Fed cuts rates by a half point

WASHINGTON — The Federal Reserve Tuesday cut U.S. interest rates by half a percentage point, the third such reduction this year, and signaled it was ready to do more if needed to revitalize the economy.

The move followed two rapid-fire reductions in January and dropped the bellwether federal funds overnight bank lending rate to 5 percent — its lowest level since mid-1999 — as Fed policymakers continued an aggressive monetary easing campaign. The Fed's decision to opt for a half-percentage point cut, instead of the more dramatic three-quarters of a percentage point reduction financial markets had hoped for, may disappoint investors.

The markets, which had been in positive territory most of the day, headed south immediately upon the Fed announcement.

Nevertheless, the Fed's action was expected to be quickly followed by announcements from commercial banks that they were reducing their prime lending rate by a similar half-point, to 8 percent, from 8.5 percent. The prime rate is the key benchmark for millions of loans, from home equity and unpaid credit cards balances to short-term loans for small businesses.

To underscore its determination to keep recession risks at bay, the powerful central bank also cut the discount rate — charged on direct Fed loans to commercial banks — by a half point to 4.5 percent.

In a detailed statement issued at the conclusion of the Federal Open Market Committee meeting, the Fed said it still sees excessive weakness as the main threat to the U.S. economy, clearly implying it stands ready to cut rates again if necessary to keep the record expansion in the world's largest economy from stalling out.

When Fed Chairman Alan Greenspan, widely credited as the principal architect of the nation's decadelong economic boom, appeared before a congressional committee early this month, he found himself in the unusual position of answering a chorus of critics who complained that his January rate reductions, aimed at reinvigorating the economy, came too late. It was a harsh turn of events for a man who had been lavishly praised throughout the past decade for his management of the economy.

"In retrospect, I see nothing that we did that strikes me as inappropriate, as far as policy is concerned," Greenspan said defensively.

Is the criticism warranted?

Millions of investors may think so. But the fact remains that while the longest-running economic expansion in U.S. history has slowed, there is no confirmation yet of a recession. Despite an increasing number of layoffs by technology companies, a record 132 million Americans are still employed, and the inflation tiger set loose 20 years ago has been tamed.

But the fact that Greenspan has had to defend himself at all is a sign of troubling economic times.

With the economy skating on the razor-thin edge of recession, the Fed is in danger of botching the "soft landing" it had hoped to engineer. The nation, and the world, hang on whether Greenspan's Fed can see this through.

"Until this point, people were praising Greenspan's policy decisions, so he could just bask," said William Cheney, senior economist for Boston-based John Hancock Financial Services. "He can't bask anymore."

The drumbeat for an even bigger rate cut intensified last week, as the NASDAQ Composite index plunged and the broader Standard & Poor's index of 500 stocks followed the technology-heavy NASDAQ deep into bear-market territory.

"Investors have little to go on, aside from the hope the Fed will rescue the stock market," said Ned Riley, chief strategist for the investment division of State Street Corp.

Greenspan has made it clear that it's not the Fed's job to bail out the market every time investors lose.

"We are not focusing monetary policy on the stock market," Greenspan said a year ago. "We are focusing on the economy."

Some economists argue that Greenspan has kept the economy growing at a sustainable pace and, based on that, has kept his reputation intact.

"If you take that narrow view of the Fed's responsibility, which I buy into," said Stanford University economics professor Robert Hall, there is no "cause for alteration from the Fed's conservative course, which is to make small interest-rate adjustments with their eye on inflation and recession, neither of which is a big deal right now."

But the slowdown is inflicting real pain, eliciting cries for help from many corners of the economy.

The manufacturing sector, for instance, has lost about 270,000 jobs during the past year. If the Fed does not take action, the National Association of Manufacturers said, capital investments by public companies will keep dropping and sink manufacturers deeper into recession.

There is no evidence, in current data, that the overall economy is in recession, which is defined as two consecutive quarters of negative growth. However, growth virtually ground to a halt during the first quarter of this year after an abrupt slowdown in the final months of 2000, according to Wall Street estimates.

Contributing: Associated Press, Boston Globe