FED LOWERS ITS FUNDS RATE.

Byline: Merrill Goozner Chicago Tribune 

Seeking to restore investor confidence in overseas markets and ward off a credit crunch at home, the Federal Reserve Board voted Tuesday for its first interest-rate cut in nearly three years.

But the quarter-point reduction to 5.25 percent in its benchmark interbank lending rate, known as the federal funds rate, fell short of many analysts' expectations and triggered immediate speculation that the move was just the first of several rate cuts that will take place over the next several months.

The decision by Federal Reserve Board Chairman Alan Greenspan and the 10 other members of the rate-setting Federal Open Market Committee to cut interest rates marks an unusually rapid turnaround in thinking among the nation's monetary authorities.

In the spring, the Federal Reserve Board seemed convinced that inflation was the greatest danger facing the soaring U.S. economy.

But the Russian economic collapse in August, coming amid a stock-market correction that sent the Dow Jones industrial average and other bellwether stock indexes plunging 19 percent or more from their midyear highs, convinced Fed officials that they no longer could ignore the rolling foreign financial crises and the threat they pose to U.S. prosperity.

``The action was taken to cushion the effects on prospective economic growth in the United States of increasing weakness in foreign economies and of less accommodative financial conditions domestically,'' said a Federal Reserve statement accompanying the rate cut.

Though its impact on the underlying U.S. economy will be slight, its psychological impact could be large, especially overseas.

It comes on the eve of two weeks of meetings in Washington among the finance ministers and central bank governors of the world's leading economies as well as the annual meetings of the International Monetary Fund and the World Bank.

``It's a clear signal that the Fed isn't asleep at the switch like other policy-makers around the world,'' said Merrill Lynch chief economist Bruce Steinberg.

On the question of future rate cuts, the Fed left itself plenty of wiggle room.

Tuesday's rate cut was not accompanied by a similar cut in the discount rate, which is the rate at which the Fed lends money to banks. A cut in the discount rate would have been a clear signal that further rate cuts were being contemplated.

``The fact they chose not to lower the discount rate means the debate must have been contentious,'' said Wayne Angell, chief economist at Bear Stearns & Co. and a Reagan appointee to the Fed who served from 1986 to 1994. ``This was the minimum move they could make given the public expectations that Alan Greenspan had created.''

Investors were clearly disappointed. The Dow fell 28.32 points to 8,080.32.

The divisions on the Fed stem from the underlying strength of the U.S. economy. Unemployment stands at a quarter-century low of 4.5 percent, and consumer spending is still strong.