Fed cuts rate
a half-point

The larger-than-expected move
is its first this year

By Jeannine Aversa
Associated Press

WASHINGTON >> The Federal Reserve, worried about the sputtering economy, cut a key interest rate by a half-point today, marking its first rate reduction this year.

After a closed-door meeting, the Federal Open Market Committee, the Fed's top policy-setting group, voted 12-0 to lower its target for the federal funds rate to 1.25 percent. The funds rate is the interest banks charge each other on overnight loans and is the Fed's main lever for influencing the economy.

"Today's additional monetary easing should prove helpful as the economy works its way through this current soft spot," the Fed said in a statement. A rate cut had been widely expected, but many analysts believed it would be only a quarter-point move. In its statement, the central bank emphasized concerns about how a possible war with Iraq would affect consumer and business confidence.

"Incoming economic data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production and employment," the Fed said.

Commercial banks' prime lending rate -- the benchmark for many consumer and business loans -- moves in lockstep with the funds rate. Banks were expected to announce a similar reduction, lowering the prime rate to 4.25 percent, which would be its lowest rate since May 1959.

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