The U.S. central bank cut the key federal funds rate - the interest rate banks charge each other - half a percentage point Monday to three percent. The rate cut marks the eighth time this year the Federal Reserve has lowered interest rates in an attempt to stimulate spending and ward off recession.
The announcement came as a surprise because the Federal Reserve's policy-making Open Market Committee was not scheduled to discuss interest rates until October 2. Bank officials say the decision was made during an early morning emergency conference call among the committee members.
Brookings Institution Economist Henry Aaron sees the rate cut as an attempt to instill public confidence in a financial system badly shaken by last Tuesday's terrorist attacks. "I don't think it's a sign of panic," he said. "The objective here is to do what can be done to maintain a measure of confidence and a sense that the authorities that manage things are going to manage them in order to counteract what are bound to be disturbances."
The announcement by the Federal Reserve was followed immediately by announcements from major U.S. banks that they will lower their prime rate, the benchmark for millions of businesses and consumer loans.
Ideally, Henry Aaron says, that will stimulate greater business and consumer borrowing and spending, which, in turn, will stimulate greater economic growth. "I think this message will be conveyed, but how effective it will be is uncertain," Mr. Aaron said.
In a written statement, the Federal Reserve said the cut was designed to prevent the terrorist attacks from putting an undue strain on a U.S. economy that had already shown signs of weakening.
The central bank stressed, however, that despite immediate concerns, the long-term prospects for U.S. economic growth remain strong. The cut brings U.S. interest rates to their lowest level in nine years.