The Federal Reserve and a trio of banks moved Friday to cut interest rates after the government reported the biggest jobless increase in three years, graphic evidence that a recession is sapping the nation's economic strength.
The Fed moved after the government reported a rise in the November unemployment rate to a three-year high of 5.9 percent and a steep loss in jobs for the second month in a row. There were 267,000 fewer jobs in the economy in November and that came after a 178,000 loss in October. Manufacturing alone lost 200,000 paid positions in November.
Just hours after the figures were released the Fed jumped into the money markets and bought $1.5 billion worth of Treasury securities, adding funds to the banking system and signaling its intention for rates to fall. As a result, the key federal funds rate at which banks lend overnight funds to each other fell by a quarter-point to 7.25 percent -- the fourth drop in this benchmark lending rate so far this year.
In addition, three banks cut the prime lending rate for the first time in nearly a year, nudging it down to 9.75 percent from 10 percent. The prime rate is a base used by banks for pricing a range of businesses and consumer loans, including many types of mortgages.
Announcing the cuts were Manufacturers & Traders Trust of Buffalo; Southwest Bank of St. Louis, historically a maverick rate-cutter, and First Fidelity Bancorp, the nation's 20th largest banking company and the largest bank in New Jersey.
The rate cut, effective Monday, raised anticipation that other banks would follow. William Sullivan of Dean Witter Reynolds Inc. predicted the 9.75 percent "will become the industrywide benchmark by early next week."
The Fed has been desperately trying to lower borrowing costs for banks, so they in turn might lower their loan rates for customers. With the cost of loans going down, more businesses and consumers might be tempted to borrow and spend more -- on everything from houses to factories -- and that in turn could stimulate growth.
Analysts said the Fed may now step up its campaign and dramatically cut the discount rate by a half a point to 6.5 percent in the next few days. That key rate has been at 7.0 percent since February 1989.
The discount rate is the most powerful lever the Fed has over the economy, influencing everything from consumer loans and home mortgages to certificates of deposit and major corporate lending rates.
Economists say it may take as long as six months for the economic juices to get flowing, and much of will depend on the course of the Persian Gulf crisis and oil prices.