'Soft Spot' In U.S. Economy Spurs Rate Cut; Another Unlikely

By John S. McClenahen Within minutes of the Federal Open Market Committee's (FOMC) unanimous Nov. 6 decision to cut short-term U.S. interest rates by 50 basis points to 1.25%, speculation on the panel's next possible move began. The FOMC's next scheduled meeting is on Dec. 10. Unless there is a dramatic deterioration in the U.S. economy between now and then -- an unlikely prospect -- Chairman Alan Greenspan and his colleagues probably won't cut interest rates again this year. In the meantime, the most recent rate cut "will provide more confidence for much-needed capital investment, help ease the credit crunch in the commercial and industrial sectors [of the U.S. economy], and combat the deflation affecting the goods-producing sector," predicts Thomas J. Duesterberg, president and CEO of the Arlington, Va.-based Manufacturers Alliance/MAPI, a business policy group. Explaining its decision to cut the federal funds rate, the interest rate banks charge each other for overnight loans, by half a percentage point rather than the more widely anticipated quarter-point reduction, the FOMC referred to economic uncertainty that is holding down spending, production and employment in the U.S. The 50-basis-point cut "should prove helpful as the economy works its way through this current soft spot," the FOMC said in a statement.

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