That meant that banks could obtain money to lend more cheaply. They wanted to wake people up with this move. As a result of the Fed's moves, several major banks, including Citibank and Bank of America, the nation's two largest, reduced their prime lending rates to 9 percent. At 6.25 percent, the federal funds rate is low enough that some banks could be encouraged to cut their prime lending rates to 8.5 percent in coming weeks even without further Fed action, some analysts said. President Bush, in his State of the Union message Tuesday night, urged quick action to lower interest rates.
Most analysts expect long-term rates to fall further given the weakness in the economy.
As that happens, rates on home mortgages should come down as well, which could help the devastated housing industry, probably the economy's hardest-hit sector. It was less clear, however, that lower interest rates would do much immediately to get banks to step up their lending to businesses, particularly because many larger banks have been hurt by heavy loan losses and have been reluctant to make new loans. Federal Reserve Chairman Alan Greenspan has said he believes this unwillingness to lend, the so-called credit crunch, along with a major decline in consumer and business confidence as a result of the Persian Gulf crisis, are the principal factors behind the recession. Some analysts, such as Lyle Gramley, a former Fed governor and now chief economist of the Mortgage Bankers Association, said the central bank's moves would work. Businesses have trimmed production schedules and payrolls as consumers, uncertain about the war's course, cut back their purchases.