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US Fed Funds at Lowest Level in 40 Years - 2001-11-07

The U.S. central bank, the Federal Reserve, has reduced short-term U.S. interest rates by another .5 percentage point. The move brings the overnight fed funds rate to 2 percent, its lowest level in 40 years.

It is the tenth time that the central bank has cut interest rates since January 1.

The cut was a full .5 percentage point, bigger than some experts had expected and a sign that monetary policy makers regard the economy as still weakening. A statement calls attention to further risks of weakness and suggests there could be another rate cut as early as next month.

The year-long easing of monetary policy reducing the cost of credit and thus encouraging borrowing is the most aggressive in 40 years. The central bank hopes that the combination of cheaper money, tax cuts, and emergency government spending will revive business activity and prompt a renewed economic expansion.

Economist Larry Kudlow says the latest interest rate cut is appropriate, given the sluggish business environment world-wide. Speaking on CNBC television, Mr. Kudlow says all ten members of the Fed's policy making committee favored a .5 point cut.

"I'm glad it was a unanimous decision because I notice there has been a lot of carping by monetarists in and outside the Fed [that the cuts should be more gradual]," said Mr. Kudlow. "And I think that view is completely false. And I think the door is open for another big cut in December which will take the fed funds rate down to one and a half percent."

This latest large cut in rates is welcomed by both consumers and businesses. Debt payments tied to changes in interest rates will be lower and debtors with higher fixed-term interest rates can refinance and save money.

Most economists believe the record ten-year long expansion of the U.S. economy came to an end, perhaps even before the terrorist attacks in New York and Washington two months ago. Growth turned negative the July to September quarter. Corporations are slashing their payrolls and consumer spending is slowing. Nearly 500,000 jobs were lost in the United States during the month of October.