The Federal Reserve's decision to cut a key interest rate will reduce Americans' borrowing costs but won't avert a recession, economists say.
The first drop in the discount rate in four years, from 7 percent to 6.5 percent, will almost certainly prompt banks to reduce their lending rates, analysts said. The discount rate is the interest the Fed charges member banks for loans.Despite a series of modest credit-loosening steps by the Fed starting in late October, major banks - under pressure to shore up their dwindling profits - have steadfastly resisted passing on lower rates to borrowers.
The prime rate - the interest that banks charge their best business customers - has been stuck at 10 percent at all but a handful of smaller institutions. A wide variety of other business and consumer loans are tied to it.
Norwest Bank of Minneapolis was the first to respond to the Fed's action. Late Tuesday, it announced a cut in its prime rate to 9.75 percent.
A drop in the discount rate is the most visible way the central bank can signal its determination to rescue the economy from a slump. For months, the Bush administration had been pressuring the independent agency to do more to stave off recession.
White House spokesman Marlin Fitzwater applauded the move, saying, "It should be helpful in promoting growth in the economy in the months ahead."
Commerce Secretary Robert A. Mosbacher called it "a very positive step." Economists agreed, but they added that looser credit is coming too late to avert a recession. They said recovery will not come until late next year, at the earliest, even if the Fed cuts rates further.