With Wall Street analysts almost evenly divided on whether or not the Federal Reserve would cut short term interest rates by .25 or .50 basis points, most were in agreement that the Fed is about at the end of its rate-cutting cycle, the lowest interest rates since 1994, and that economic recovery is on its own now.

The stock market immediately responded with a dip, while some traders using sell-offs to express concern that the rate cut was .25 basis points instead of .50, but others are encouraged, believing that the smaller interest cut is a signal that the economy is showing signs of recovery.

While the Fed expressed willingness to cut rates further when it meets again August 21, the rate for federal funds charged for overnight lending between banks is now at 3.75 percent, less than .75 basis points away from typical inflation rates of three percent.

The rate cuts are meant to encourage consumer spending, but market watchers say that company spending will be the key to true economic recovery.

Among the economic signs that may have influenced the Fed toward a more modest cut are positive signs of growth including a small increase in new home sales in May. The .8 percent rise to a seasonally adjusted 928,000 annual pace was the strongest increase since March, said the Commerce Department, as well as a rebound from upwardly revised April figures which reflected a 4.5 percent decline to a 921,000 annual rate.

Affordable interest rates, over a point and a half below what they were this same time last year, is helping fuel the homebuying sector. Sales are equally brisk for existing homes, reports the National Association of Realtors, where May home sales rose 2.9 percent to an annual rate of 5.37 million. At this rate, NAR members could have one of the best years in history. At the least, this year could extend the three-year sales-breaking record streak that the NAR has been on. Current homeownership rates are about 68 percent, the highest in history.

Home sales, as well as the broader economy, are driven largely by consumer confidence which is also rising. The Conference Board, an economic research company, reported ahead of the Fed rate cut that its broad index of consumer attitudes rose to 117.9 in June from 116.1 in May. In addition, the Commerce Department said that orders for big-ticket items rose for such things as cars, planes, and semiconductors. Durable goods orders increased 2.9 percent in May to $188.55 billion after a 5.5 percent drop in April.

Economists say that the effects of rate hikes and cuts are about six months out. The Fed began the first of its six rate cuts in January 2001. The rate cut yesterday was the first one of six cuts that was .25 basis points instead of .50, which many may interpret as a sign that the economy is easing.

Published: June 28, 2001

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