Fed cuts short-term rate by 0.5%P

The Federal Reserve Board (FRB), the central bank of the United States, slashed a key interest rate by half a percentage point Tuesday in a bid to encourage

Americans to spend and invest to help revive a sluggish U.S. economy.

The Fed cut the federal funds (FF) rate, the interest that banks charge each other on overnight loans, from 5.5 percent to 5.0 percent. It also lowered the

discount rate on loans to banking institutions from 5.0 percent to 4.5 percent.

Explaining its decision to cut the rates again, the central bank said, ``Persistent pressures on profit margins are restraining investment spending and,

through declines in equity wealth, consumption. The associated backup in inventories has induced a rapid response in manufacturing output and, with spending having firmed a bit since last year, inventory adjustment appears to be well underway.’’ The Fed also said, ``Excess productive capacity has emerged recently. The possibility that this excess could continue for some time and the potential for weakness in global economic conditions suggest substantial risks that demand and production could remain soft.’’

The Fed also hinted at the possibility of another rate cut after the scheduled May 15 meeting of the Federal Open Market Committee (FOMC).

``In these circumstances, when the economic situation could be evolving rapidly, the Federal Reserve will need to monitor developments closely,’’it said.

The half-point cut disappointed Wall Street investors, who launched a huge sell-off, causing both the Dow Jones and Nasdaq indices to nosedive. Intel`s 8percent drop led the fall as the Nasdaq closed at 1857.44, down 93.74 points or 8 percent, while the Dow closed at 9720.76, down 238.35 points or 2.39 percent.

amdg333@donga.com