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Interest rates cut by Federal Reserve

WASHINGTON (AP) -- The Federal Reserve cut interest rates for the second time in two months yesterday, hurrying to the rescue of a faltering economy. Major banks immediately reduced their own lending rates, meaning lower borrowing costs for millions of Americans.

The stock market, which had surged on Tuesday in anticipation of the Fed's credit relief, set another record yesterday. The Dow Jones industrial average closed at 5,394.94, up 13.73.

Private analysts said further rate reductions were likely as the Federal Reserve tries to stave off recession.

The Fed said it was cutting its target for the federal funds rate, the interest that banks charge each other on overnight loans, from 5.5 percent to 5.25 percent. It also reduced its largely symbolic discount rate, the interest it charges on direct loans to banks, to 5 percent.

The actions should stimulate economic activity by lowering the cost of credit. But the Fed's statement said merely that the reductions could be made because "moderating economic expansion in recent months has reduced potential inflationary pressures."

Chase Manhattan was the first major bank to announce a cut in its prime rate, and other banks quickly followed suit. The prime rate, the benchmark for many business and consumer loans, was cut to 8.25 percent from 8.5 percent.

Private economists, who had been urging the central bank to act, said they believed yesterday's reduction in the funds rate, the third since July, would not be the last.

"Given how soft the economy is, we are going to see more easing," said Lawrence Chimerine, chief economist at the Economic Strategy Institute in Washington. "The Fed overtightened a year ago and they have been moving too slowly to reverse that. We have a threat of a recession."

The central bank from February 1994 to February 1995 was increasing interest rates, doubling the funds rate from 3 percent to 6 percent in an effort to slow the economy to keep inflation in check.

The economy did slow. But when the Fed's hoped-for "soft landing" threatened to turn into something worse, the central bank reversed course and trimmed the funds rate by a quarter point last July. While many economists expected a series of rate cuts, the central bank waited until December to trim again.

The Clinton administration, which is hoping for a strong economy in this election year, was cautious

releases its December report on consumer prices. They believe for the fourth straight year consumer prices will have risen less than 3 percent, something that has not happened since the mid-1960s.