The Federal Reserve lowered two key interest rates Tuesday in a manner that emphasized its resolve to fight a deepening U.S. recession.
The central bank first announced that it was cutting the discount rate - the interest it charges to make loans to commercial banks - from 6 percent to 5.5 percent.Later Tuesday, the Fed added reserves to the banking system as a way of pushing the federal funds rate down to a target of 5.75 percent. The funds rate - the interest banks charge each other for loans - had been at 6 percent.
While the Fed does not officially announce changes in the funds rate, analysts said the manner in which it added reserves to the banking system Tuesday left no doubt that it was targeting a lower rate.
"This is a long overdue reduction (in rates) for an economy that simply is not responding yet," said Allen Sinai, chief economist of the Boston Co. "The economy remains mired in recession."
The drop in the discount rate was the third reduction since Dec. 18. It marked the second time in this recession that the Fed has moved on the same day to reduce both the discount rate and the federal funds rate. It cut both by one-half of a percentage point on Feb. 1.
Some analysts said they looked for corresponding reductions in a variety of consumer and business loans, including a drop in the prime rate.
The Fed had been under growing pressure from the Bush administration in recent weeks to do more to fight the downturn in the economy. President Bush urged the Fed to lower the rate last Thursday, saying, "We want to see these interest rates down a little bit, and I think that would be good for the world economy, including our own."