Fed board springs 'surprise' with half-point cut in rates

WASHINGTON -- The Federal Reserve on Wednesday reduced a key interest rate by one-half of a percentage point as the central bank tries to keep America's stop-and-go recovery from stalling amid worries about a war with Iraq.

Commercial banks were expected to respond by moving a benchmark consumer rate to its lowest point since 1959.

The Fed moved the federal funds rate from its already low 1.75 percent, where it had stood for 11 months, to 1.25 percent, surprising many analysts who had forecast a quarter-point move. They believed the Fed would want to conserve its power to aid the economy, given the bank's aggressive cuts last year that left it with little room to lower rates.

But analysts said the Fed apparently has grown so concerned about the weakening economy that it decided on bold action. In recent weeks, economic reports have shown unemployment rising to 5.7 percent, the manufacturing sector stumbling further and consumer confidence hitting a nine-year low.

"The Fed wanted to inject an element of surprise in an effort to boost financial markets and in that way lower risks from a wobbly economy and a possible war with Iraq," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Climbing Dow

Wall Street had climbed to its highest level in two months in anticipation of a Fed rate cut and finished Wednesday with the Dow Jones industrial average gaining 92.74 points to close at 8,771.01.

M&T Bank, a large regional bank with branches in the Northeast, and AmSouth, a bank with 600 branches in the Southeast, were the first to cut first to respond by cutting their prime rates to 4.25 percent, the lowest level since May 1959. Similar moves were expected by other commercial banks in the coming days.

The Fed also returned to a neutral policy stance -- indicating that economic risks were equally balanced between inflation and weak growth. In August and September, the Fed's statement was weighted more toward economic weakness.

Some analysts said they believed this switch was meant to signal the half-point cut would be the only one this year. Other economists said they thought a further reduction could come at policy-makers' meeting either in December or January.

"If things improve and a possible war with Iraq recedes, then they may not have to cut rates again. But my guess is that we will get another quarter-point move in January," said David Wyss, chief economist at Standard & Poor's in New York.

The rate cut came on a 12-0 vote of the central bank's policy setting Federal Open Market Committee.