NEW YORK (CNNfn) - The Federal Reserve cut a key short-term interest rate Tuesday in a move designed to stave off a slowdown of the U.S. economy and reduce the cost of borrowing.
In a widely anticipated move, the Federal Open Market Committee cut the federal funds rate by a quarter of a point to 5.25 percent. 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 left unchanged at 5.0 percent.
In a brief statement, the Fed said it made the move because the United States was starting to feel the effects of the global economic turmoil.
"The action was taken to cushion the effects on prospective economic growth in the United States of increasing weakness in foreign economies, and of less accommodative financial conditions domestically," the FOMC said in a statement.
"The recent changes in the global economy and adjustments in U.S. financial markets mean that a slightly lower federal funds rate should now be consistent with keeping inflation low and sustaining economic growth going forward."
Cut follows hint by Greenspan
In recent weeks, Fed Chairman Alan Greenspan has indicated that while the U.S. economy remains strong, it has been showing signs of softness in such areas as manufacturing.
Many investors had hoped for a deeper cut. The Dow Jones industrial average was down more than 80 points shortly after the announcement but had clawed its way back to stand at 8,079, down only 29 points, by 3:15 p.m.
Financial markets around the globe had widely expected the U.S. central bank to ease credit conditions in response to the upheaval that has swept world financial markets, but some investors had hoped the Fed would send an even stronger signal by delivering a more pronounced cut in the fed funds rate.
"This move is conservative and the fact they did not touch the discount rate reflects that. But since the move was taken to calm some of the recent financial market panic, this may not have done that," said Henry Willmore, senior economist at Barclays Capital in New York.
Maureen Allyn, chief economist at Scudder Kemper Investments, told CNNfn that given Greenspan's penchant for making moves gradually, there will probably be more rate cuts to come over the next few months. [229K WAV] or [229K AIFF]
Lower auto, mortgage rates ahead
A cut in the federal funds rate means the nation's banks will likely cut their prime rates, which are tied to consumer loans for such items as homes and cars.
Late Tuesday, U.S. Bancorp (USB.N) lowered its prime rate to 8.25 percent from 8.5 percent.
Though the FOMC said cutting the federal funds rate by only a quarter of a point will keep inflation at bay, Allyn said that threat doesn't currently exist. [188K WAV] or [188K AIFF]
Tuesday's cut marked the first time the Fed moved to cut short-term interest rates since Jan. 1996, when it cut the discount rate by a quarter percent.
Last week's near-collapse of Long-Term Capital Management L.P., a huge U.S. hedge fund specializing in more risky investments, underscored the Fed's concern that the global turmoil had finally hit the shores of the world's top economy.
"I think this is an important first step for the central bank. They didn't want to lower rates too aggressively for fear of sending a signal to the markets that they thought things were completely falling apart," said Anthony Chan, chief economist at Banc One Investment Advisors in Columbus, Ohio.
The rate-setting Federal Open Market Committee's next scheduled meeting is set for Nov. 17.