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News > Economy
Fed cuts interest rates
November 17, 1998: 6:15 p.m. ET

Central bank reduces both discount rate and federal funds rate by 0.25%
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NEW YORK (CNNfn) - The Federal Reserve Tuesday cut interest rates for the third time this year in a widely anticipated move, citing "unusual strains" in financial markets.
     In line with most expectations, the Federal Open Market Committee cut the federal funds rate by a quarter of a point to 4.75 percent, the lowest rate since August 1994. The federal funds rate is an overnight bank lending rate that is a benchmark for other short-term interest rates.
     The rarely used discount rate charged on emergency loans to commercial banks was also reduced by one-quarter of a point to 4.5 percent.
     A spokeswoman for the Fed said the decision to cut the discount rate was unanimous.
     Shortly after the announcement, a number of banks cut their prime rate, or the rate banks charge their best customers, which should mean lower borrowing costs in the future for everything from home loans to credit card purchases.
     The stock market reacted sharply to the news, erasing a 65-point deficit after the rate cut was announced. By 2:20 p.m., the Dow industrials were up more than 15 points at 9,028. However, by the closing bell, the Dow edged lower again to 8,986 -- down almost 25 points.
     In a brief statement, the Fed conceded that "financial markets have settled down materially since mid-October," but said "unusual strains" remain.
     "With the 75-basis-point decline in the federal funds rate since September, financial conditions can reasonably be expected to be consistent with fostering sustained economic expansion while keeping inflationary pressures subdued," the statement said.
     One economist called the cut a preemptive strike.
     "What we're seeing is aggressive taking out of insurance by the Federal Reserve to make sure we don't have anything like the 1920s or 30s happen," Allen Sinai, chief global economist at Primark Decision Economics, Inc., said.
     But the move to cut the discount rate, in addition to the federal funds rate, caught some by surprise.
     "Clearly, the Fed is in the midst of a series of easing steps and is prepared to ease further if necessary to counter unstable financial market conditions or slower growth," David Jones, vice chairman and chief economist at Aubrey G. Lanston & Co., said.
     Jones said the reduction in both rates indicates Federal Reserve Chairman Alan Greenspan remains concerned about instability in the financial markets.
     Dan Seto, senior economist for Nikko Securities Co., agreed.
     "I think that the 25-basis point discount rate cut gives [the Fed] some room for further fine tuning," Seto said. "There are broad expectations on the discount rate, but I think most analysts would look at [the Fed's] action, or inaction, on the discount rate as a clue to where they stand in terms of a bias. The fact that they did cut the discount rate suggests that they are prepared to move again if necessary."
     Preston Martin, a former Federal Reserve vice chairman and economist at Preston Associates, said the rate adjustments were not a surprise, but a "matter of timing," adding that the Federal Reserve simply reacted to "the magnitude of the international problems." (239K WAV) or (239K AIFF)
     The last time the Federal Reserve cut the rate was on Oct. 15, in a highly unorthodox move that came between formal sessions of the Fed's policy-making Open Market Committee. At that time, the U.S. central bank slashed its key overnight Federal funds rate by a quarter point to 5 percent.
     Analysts immediately focused on the Fed's next -- and this year's final -- rate meeting, scheduled for Dec. 22. Whether or not the Fed would cut rates again would most of all depend on conditions in world financial markets, they said.
     "While it's quite possible that the Fed won't move again in December, it hasn't done anything that would formally prevent it from doing so," said veteran Fed-watcher Lou Crandall, chief economist at Wrightson and Associates in New York.Back to top
     -- from staff and wire reports

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.