The Federal Reserve acted to lower interest rates Friday by taking steps to slash its federal funds rate on interbank loans to about 7.5 percent from 7.75 percent, economists said.
Although the rate headed higher on technical factors later in the day, lower rates on consumer and business loans and mortgages are expected to follow the Fed's latest move, the third such modest cut since mid-July to bolster a deteriorating economy.For example, the Department of Veterans Affairs lowered its maximum interest rate to 9.5 percent from 10 percent effective Monday to "provide a significant stimulus to the housing market and the economy as a whole," an official said.
It was the first cut in the VA rate since July 1989.
The Fed action involved pumping cash into the banking system through the sale of securitites.
"The Fed has definitely eased here," said Allen Sinai, chief economist at the Boston Co. "They did an aggressive adding of funds to the system. They want lower short-term rates. This is a clear signal."
But Robert Dieli, an economist at Northern Trust in Chicago, said the Fed's action appeared to be very subtle.
"They're being real coy about it," he said. "They want to do it in a way that's going to get them the most bang for the buck. I don't think they feel the time is right for the big push right now."
Sam Kahan, chief economist at Fuji Securities in Chicago, said there are indications that the core rate of inflation, excluding surging oil prices, may be easing.
The Labor Department reported Friday consumer inflation dipped slightly in October as retail prices rose 0.6 percent after gaining 0.8 percent in each of the two previous months.
Despite the apparent cooling, though, consumers have paid a steep price in the three months since Iraq's lightning invasion of Kuwait, with prices leaping 8.9 percent.
"Inflation was high, but ex-food and energy agreeable," Sinai said. "I don't think the Fed has any choice. They have to cushion what is looking like an ever worsening downturn."
Nonetheless, "there may be good times ahead on the inflation front," Kahan said, noting housing and service sector costs appear to be heading downward as the economy falters.
Sinai also said he expected a cut in the discount rate, the rate the Fed charges on loans to financial institutions, by the end of the year. The discount rate is considered a symbolic tool of monetary policy that serves as the central bank's primary indicator of credit conditions.
The Fed last changed the discount rate Feb. 24, 1989, when it was increased to 7 percent from 6.5 percent.