The Federal Reserve Board yesterday cut its discount rate from 6.5 percent to 6 percent, the lowest level in 8 1/2 years, in an effort to spur a stubbornly sluggish American economy.
Financial analysts said they expect major banks to follow the Fed's action, within a few days at most, by reducing their prime lending rate from 8.5 percent to 8 percent.
Many other short-term interest rates set by market forces -- such as those on U.S. Treasury securities and bank certificates of deposit -- had already declined in anticipation that the continued poor economic news would cause the Fed to cut the discount rate, which is the interest rate it charges on loans to financial institutions.
Most forecasters, including those at the Fed, had expected previous interest-rate declines, low inflation and an improving trade balance to spark a surge in economic activity in the second half of 1986.
But so far, there is little, if any, sign of such a pickup in the statistics covering employment, production, new orders for goods, and the trade deficit, analysts said.
With scant evidence that the economy was about to climb out of the 2 percent growth rut it has been in for the past two years, pressure had been mounting on the Fed to act. This week, senior White House officials, including chief of staff Donald T. Regan, called publicly for a discount-rate cut.
Senate Majority Leader Robert J. Dole (R-Kan.) had also been urging the Fed to lower rates, and yesterday praised it for doing so. "It's the first step in stabilizing, and, hopefully, stimulating, today's sluggish economy. Now it's up to Congress to close the deal by attacking the federal deficit head-on," Dole declared in a statement.
Some analysts questioned whether a half-point reduction in the rate would be enough to make much difference in the economy, at least any time soon.
"Unfortunately, cutting interest rates right now doesn't have much kick," said Lawrence Chimerine of Chase Econometrics. "The issue is not to trigger a surge in the economy. The issue is to keep it from deteriorating."
Chimerine and a number of other economists said they believe that such factors as a large excess of production capacity are depressing business investments, one of the weakest sectors of the economy, and that lower interest rates won't help much in the short run.
The board members were unanimous in approving the rate cut, which will be effective today. The discount rate was cut from 7.5 percent to 7 percent on March 7 following a bitter internal debate that at one point saw a four-member majority order the cut over the objection of Chairman Paul A. Volcker. Before that step was announced, the cut was held in abeyance until Volcker was able to persuade the Japanese and West German central banks to cut their rates as well.
As a result of that coordination, the March discount-rate cut did not undermine the already weak foreign-exchange value of the U.S. dollar compared with that of the Japanese yen or the German mark. Volcker had resisted that discount-rate cut primarily because of worries about the dollar.
The Fed further reduced its discount rate on April 21 to 6.5 percent, and the Japanese again followed, while the Germans did not. Since then, both nations have resisted pressure to make more cuts to stimulate their domestic economies, which would improve markets for American exports.
Before yesterday's cut was announced, Satoshi Sumita, governor of the Bank of Japan, said that Japan had no intention of lowering the discount rate now. Sumita said that credit conditions in Japan had "eased sufficiently" so that there was no immediate need to lower the rate, which, at 3.5 percent, is already at its lowest level ever.
The Fed's announcement indicated that the board acted for purely domestic economic reasons, and in the absence of any sign of increasing inflation. There was no mention whatsoever of the dollar, the level of interest rates in any other country, or the rapid growth of the money supply, all of which had been cited earlier by Fed officials as limiting their willingness to reduce rates.
The rate cut, the announcement said, "conforming in part to recent declines in a number of market interest rates, was taken within the framework of the generally accommodative stance of monetary policy that has prevailed for some time.
"More specifically, the action appeared appropriate in the context of a pattern of relatively slow growth that is comfortably within capacity constraints in the United States and in the industrialized world generally. That pattern has been accompanied by relatively low prices of a number of important commodities and greater stability in prices of goods generally."
The announcement also noted that two measures of money supply, M2 and M3, are near the midpoints of the target ranges set for them earlier this year. Significantly, there was no mention of M1, the measure most closely watched by the Fed in the past.
M1, which includes readily usable money in the form of currency in circulation and checking deposits at financial institutions, is far above the upper limit of its target range. However, its past relationships to economic growth and inflation apparently have been severed, at least temporarily. Policy makers have been ignoring M1's rapid growth, but have expressed concern that money already pumped into the economy might fuel an unexpected surge in the economy and in inflation.
M2 and M3 are broader monetary aggregates that include savings and time deposits and other items.
The Fed's Federal Open Market Committee met this week to set growth targets for the remainder of this year and to set tentative goals for 1987. Volcker will disclose the FOMC decisions at a Senate Banking Committee hearing July 23.