Fed, Banks Cut Rates; Effect Called Negligible

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Fed, Banks Cut Rates; Effect Called Negligible

Despite reductions in the discount rate and prime rate on Friday, economists expressed doubts that the economy would be invigorated any time soon.

In a long-expected move, the Federal Reserve cut its discount rate Friday by a half point, to 5%, leading major banks to cut their prime rates to 8% from 8.5%.

The discount rate now stands at its lowest level since 1973 and the prime rate at its lowest point since 1987.

Debt Levels High

In playing down the likely impact of the rate cuts, economists pointed out that consumers, businesses, and governments are all burdened by record levels of debt. Thus, their interest in further borrowing is likely to be limited. Without new borrowing, spending will not accelerate and the economy will stay weak.

"I'm hopeful the move will keep us out of recession, but I doubt it will prompt any significant improvement," said Ward McCarthy, a managing director at Stone & McCarthy Research Associates. "This recovery is anemic and it's going to stay that way."

Fed Funds and Prime Are Cut

The discount rate move was followed within hours by a cut in the target fed funds rate to 5.25% from 5.5%, a further indication of the central bank's desire to stimulate economic activity.

By Friday afternoon, Morgan Guaranty Trust, Citibank, Chemical Bank, First Interstate, Bankers Trust, and Chase Manhattan had cut their base lending rates by 50 basis points. Other banks were expected to follow.

But the reduced prime is no guarantee of increased loan demand, since banks account only for 18% of all lending activity, said Raymond Dalio, president of Bridgewater Associates, a money management firm.

Skepticism on Impact

"I don't think you're going to see a pickup in loan activity," Mr. Dalio said.

Nor do lower interest rates automatically reduce the massive amounts of debt already outstanding. …