The nation's central bankers delivered a mixed message
Wednesday by trimming interest rates yet again as if the
economy needed help, but expressing confidence that recovery
The Federal Reserve's elite committee cut the benchmark
short-term interest rate by 0.25 percent. That took the rate
down to 1 percent -- a level last seen in July 1958.
The Fed committee said the cuts are "further support for an
economy which it expects to improve over time."
Duke University economist Campbell Harvey said the Fed
seemed to be saying two things at once.
"There's nothing that suggests the economy is taking a turn
for the worse," he said. "So this is a confusing signal. In a
way, it's a negative signal."
With a larger cut expected by some economists and
investors, the move didn't please Wall Street. The Dow Jones
Industrial average fell 98 points, while the tech-driven
Nasdaq index slipped almost 3 points.
The latest rate reduction is certain to reverberate beyond
Wall Street. Rate cuts ripple through the economy, fueling
low-interest deals on appliances and autos. They often mean
lower rates on credit card borrowing -- although some credit
cards are near their minimum. They also further shave payments
from money markets and other low-risk investments.
Partly because low rates squeeze lenders and hurt people
who get much of their income from interest, some Fed studies
have shown the benchmark rate should not fall below 0.75
That leaves the Fed nearly out of its traditional
ammunition. After that, mostly untraditional methods remain --
like buying long-term bonds to keep mortgage rates low.
So far, lower rates have had limited success at moving
companies to invest and hire. The economy has lost more than
500,000 jobs since the fall.
While Fed officials had predicted a postwar rebound from
the Iraq invasion, signs of the pickup have been modest,
though many forecasters see solid growth by year's end.
Between tax cuts, federal spending and already low interest
rates, a huge amount of stimulus is wending its way through
the economy already.
Still, while 70 percent of corporate financial officers are
optimistic, their companies are planning to expand investment
by a mere 1.2 percent, according to a survey released this
week by Duke's Fuqua School of Business.
Cutting rates for the 13th time during the economy's
three-year malaise may add still more enticement, but it will
not spur companies into long-delayed spending plans, Duke's
"It is hard to imagine that this is going to make any
difference whatsoever," he said.
The Fed campaign to spur spending and kick the recovery
into gear started in January 2001 when the benchmark interest
rate was 6.5 percent. In some ways, Fed success has been
The rate cuts fueled unprecedented sales in housing, with a
record number of Americans now owning homes. And millions of
Americans have used low mortgage rates to reduce house
payments through refinancing.
Real estate has kept roaring. New-home sales in May jumped
12.5 percent to a record, according to data released
Sales of existing homes also were up, although just 1.2
percent. Applications for mortgages have stayed high,
suggesting sales in June are still strong, said Maury Harris,
chief economist for UBS Warburg.
Real estate is seen as critical to keeping the economy
moving. And while the Fed does not directly control
longer-term bonds on which mortgage rates are based, it
urgently wants real estate to stay hot.
The Fed has flirted publicly with the idea of buying
long-term bonds, which would keep rates low. But it has so far
avoided that move in favor of talking, said economic
forecaster Rajeev Dhawan of Georgia State University.
"They can only jawbone it -- and that has absolutely
worked," Dhawan said.
But with modest signs of recovery emerging, even the
smaller cut was not needed, Dhawan argued. "This was a
compromise between what they should have done and what was
The Fed knows the rate cut's economic effect is small, but
they have other targets, like inspiring investor confidence,
said Preston Martin, a former Fed vice chairman and now
chairman of Martin Associates, a financial services firm.
"Because of the psychologies of the various markets, the
Fed is giving a signal that they are continuing to stimulate
economic growth," he said.
Moreover, the specter of deflation still hovers over the
economy, and Fed officials have vowed to fight it
aggressively, Martin said. "They are adding to the money
supply four times as fast as the economy is growing. They are
relaxing bank regulations. They are trying to stimulate the
economy every way they can."