Fed Action Viewed as Restrained: Fed Expected To Cut Rates Only Slightly
The Federal Reserve, seeing few signs of a financial crisis in Fri-dayÛªs big stock market drop, yesterday added $2 billion in cash to the banking system in such a restrained way that it convinced most analysts not to look for a sharp drop in interest rates.</br></br>Some analysts said they thought the stock market drop likely would cause the Fed to lower the federal funds rateÛÓthe key interest rate financial institutions charge one another for overnight loansÛÓfrom about 9 percent to 8.75 percent or a bit less.</br></br>But Federal Reserve officials, like their counterparts elsewhere in government, are waiting to see whether the market decline re- i sumes. Since the economy is much i less buoyant now than it was prior 1 to the stock market crash in October 1987, any depressing impact from falling stock prices on consumer spending or business investment could virtually eliminate growth.</br></br>Over the weekend, unidentified senior Federal Reserve officials said the central bank would supply cash to the banking system to reassure investors adequate credit would be available if loans were needed as a result of falling stock prices.</br></br>But other Fed officials were uncomfortable with the published comments, arguing that they all but forced the central bank to add cash to the banking system yesterday even if it was not needed. As it was, the Fed action came later in the day than analysts had expected and involved only $2 billion, considerably less than they had anticipated.