Fed signals its sixth move in five months to cut interest rates

January 09, 1991|By Los Angeles Times

WASHINGTON -- Amid growing fears that the recession and the banking crisis may be worsening, the Federal Reserve Board moved yesterday to cut interest rates again, the sixth reduction it has engineered since Iraq's invasion of Kuwait in August.

Although the Fed made no announcement of its move, it apparently cut the benchmark federal funds rate to 6.75 percent from 7 percent, market analysts said.

The federal funds rate -- the interest that banks charge each other for short-term, overnight loans -- has been cut by the Fed five times since August, when it stood at 8 percent. Although the board cannot force banks to go along, it manipulates the rate through its intervention in the credit markets.

The central bank also cut the discount rate -- the interest the Fed charges member banks for loans -- by a half percentage point shortly before Christmas.

Besides the rate cuts, the Fed moved late last year to ease its grip on monetary policy by reducing its requirements on the amount of money that banks must hold in reserve to back up their deposits, a policy change that freed up more funds for consumer and commercial lending.

The latest move followed a flurry of actions by the Fed in December to ease its grip on the economy. Coming so quickly after the discount-rate reduction, the federal funds rate cut signals Fed Chairman Alan Greenspan's increasing concern about the health of the banking industry and the economy in general, analysts said.

"The general impression that most people get now is that we are in for a further weakening and that the economy seems listless," observed Robert Hormats, vice chairman of Goldman Sachs International in New York.

Analysts noted that the key economic indicators monitored by the Fed as it sets interest rate targets are looking uniformly grim.

In fact, one of the Fed's most important indicators -- the rate of growth of the money supply -- has offered particularly negative readings lately. Money-supply growth fell to an annual rate of zero during the fourth quarter, far below the central bank's targets.

A stagnant money supply indicates that the economy is contracting, prompting the Fed to act quickly, analysts said. As a result, the central bank did not wait for the government reports on December's inflation rate, due later this month, before deciding to ease the interest rate further. Mr. Greenspan clearly feels that inflation is no longer as great a threat as the possibility of a severe slump.

In fact, the lack of money growth reflects just how difficult it has become for banks to expand their lending activity. Before banks can increase lending, they must shore up their balance sheets, which were severely weakened by the real estate and "junk" bond borrowing binges of the 1980s.

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