Fed cuts rate used for loans between banks 3.75 percent rate is endorsed by financial markets.

April 10, 1992|By Thomas Easton | Thomas Easton,New York Bureau

NEW YORK IHB — NEW YORK -- Against a backdrop of a suspect recovery, the Federal Reserve Board drove a key interest rate down yesterday to levels not witnessed since the mid-1960s.

The reduction in the federal funds rate, used for loans between banks, to 3.75 percent from 4 percent was endorsed by the financial markets: Stock and bond prices rallied.

The Dow Jones industrial average, down nearly 100 points earlier this week, bounced back with a 43.61 rise yesterday, closing at 3,224.96. Yields on the bellwether 30-year Treasury bond fell to 7.86 percent from 7.91 as prices rose about one-half percent.

The Fed cut came as government statistics and corporate reports suggested weakness in retail sales and money supply growth, among other key gauges.

"The economy hit an air pocket in March," said Jay Woodworth, senior economist at Bankers Trust, and the Fed's action "just improves the odds for a recovery."

The rate cut was slight, but several analysts said it might be a preliminary step for a more decisive move.

"If this is all they will give us, they might not have bothered at all," said Edward Yardeni, chief economist at C. J. Lawrence.

The quarter-point drop might be too narrow to permit another round of prime rate reductions by major banks. It should, how

ever, swell the margin between their cost of funds and their lending rates, further bolstering the beleaguered industry's recovering profitability and lay the groundwork for future cuts to be passed along, Mr. Yardeni said.

News of the Fed's action came about 11:30 a.m. and, unlike some efforts by the central bank, appeared to be orchestrated for wide publicity.

Although the news had an electric affect on securities prices, activity on the New York Stock Exchange remained restrained. Still, trading was relatively heavy.

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