Fed Cuts Rates in Bid to Boost Economy; Banks Trim Prime but Don't See Demand: Discount Rate Falls to 4.5% as Concern Is Expressed over Crisis of Confidence
WASHINGTON -- The Federal Reserve made its boldest bid since February to get the economy moving again, cutting two key interest rates.</br></br>The Fed dropped its discount rate to 4.5% from 5% and cut the federal funds rate to 4.75% from 5%. Together, the moves prompted banks to cut their prime lending rates to 7.5% from 8%. Other interest rates are likely to fall as well.</br></br>The action followed a meeting Tuesday of the Fed's policy committee, during which officials talked at length about the pessimism that has gripped the U.S. economy, according to some who attended. They noted the sharp drop in consumer confidence in October, as well as the sour attitude of many business executives, including those who sit on the boards of the 12 district Federal Reserve Banks.</br></br>In response to that crisis of confidence, Fed officials decided to take more dramatic action than usual, to give a psychological kick to the economy. The effect was amplified by the fact that it came just one week after the central bank's previous credit-easing move, when it cut the federal funds rate to 5% from 5.25%.</br></br>The federal funds rate is the interest rate that banks charge on loans to each other, and broadly influences other shortterm interest rates. The discount rate is the rate the Fed charges on loans to financial institutions, and is important largely for its symbolic value.