The Federal Reserve Board announced yesterday that it was cutting its discount rate from 8 1/2 percent to 8 percent, the lowest level in more than six years.
The move, which takes effect Monday, underscored the intention of the nation's central bank to continue easing monetary policy until there is strong evidence that the slowdown in economic growth that began at mid-year is over, analysts said.
The reduction in the interest rate the Fed charges when it makes loans to depository institutions does not necessarily mean lower interest rates are on the way. Day-to-day Fed interventions in financial markets have already helped push market rates down sharply in recent weeks.
Some "administered" rates, such as the 10 3/4 percent prime lending rate at commercial banks, could well fall to move more in line with market rates.
An 8 percent discount rate is more or less consistent with the level of those rates set daily by competitive forces, analysts said.
Yesterday's action was not regarded by the economic analysts as an aggressive step similar to the half-point cut in the rate announced the day before Thanksgiving.
That time the Fed was using the discount rate to signal the market that it wanted the whole structure of rates lower. Furthermore, indications are mounting that economic growth is picking up again.
Earlier this week, the Commerce Department said the gross national product, adjusted for inflation, is expanding at a 2.8 percent annual rate, up from the 1.6 percent rate of the third quarter.
Yesterday the department reported that new orders for durable goods jumped 8.3 percent in November following four consecutive monthly declines.
Separately, the Fed also released a record of the Nov. 7 meeting of its policy making group, the Federal Open Market Committee, at which the FOMC voted to ease policy is a series of limited steps.
The FOMC lowered the range for the key federal funds rate -- the interest rate financial institutions charge when they loan one another required reserves -- by a percentage point, to between 7 and 11 percent.
In its discount rate announcement, the Federal Reserve Board said, "The action is designed to bring the discount rate in more appropriate alignment with short-term interest rates.
"It was taken in the general context of the moderation of growth in economic activity since mid-year, continued relative stability or declines in sensitive commodity prices, and strength of the dollar internationally."
The statement also noted that the two most closely watched measures of money, M1 and M2, "have remained within desired longer-run ranges, but growth in M1 has on average been relatively sluggish in recent months."
In other words, lowering interest rates to spur money growth would be desirable and would not keep the Fed from keeping the money supply within the chosen target ranges.
The discount rate reduction was approved on a 5-to-1 vote by the Board. Fed Gov. Lyle Gramley opposed the further move toward ease, while Gov. Martha Seger was absent.
Gramley also dissented on Nov. 7 at a meeting of the Federal Open Market Committee, when the majority of the central bank's policymakers decided to ease policy another notch, according to a policy record of that meeting released yesterday.
The FOMC majority, concerned about slow money growth and the economic "pause," voted to ease pressure on bank reserves -- the key point of Fed intervention in the market -- and indicated that staff conducting day-to-day operations "should be particularly alert to the possible need for adjustment toward lesser restraint."
Growth of M1, the money measure that includes currency and travelers checks in circulation and checking deposits at financial institutions, accelerated in November after a small drop in October. However, it fell a record $7 billion in the week ended Dec. 3 and regained only half that lost ground the following week.
M2 shot up at a 15 percent annual rate last month, a development that eased some of the Fed's worry over the shortfall in money growth. Some members of the FOMC, the policy record said, do not want to put too much stress on M1 while M2 is rising more rapidly.