Fed announces surprise rate cut

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In the wake of plummeting stock prices, lackluster holiday sales and declining consumer confidence, the Federal Reserve Board fired off a dramatic and unexpected one-half of one percentage point interest rate cut.

The Fed’s Federal Open Market Committee, which sets interest rate policy, wasn’t scheduled to meet until Jan. 30 and 31. But committee members, including Chairman Alan Greenspan, decided swift action was required because the economy has degenerated so quickly since their last gathering Dec. 19.

Officials will lower the federal funds rate to 6 percent from 6.5 percent and reduce the federal discount rate to 5.75 percent from 6 percent. They said they could lower the discount rate an additional one-quarter of a percentage point, or 25 basis points, if needed.

The FOMC also reiterated that the risk of excessive econmic weakness outweighs the risk of accelerating inflation. Prior to December, officials had said for months that inflation was the primary threat.

The moves substantially change the playing field for borrowers, who will now see rates on everything from home equity loans to credit cards fall much sooner than anticipated. Rates for certificate of deposit holders and mortgage shoppers should decline further than they already have, too.

“These actions were taken in light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets, and high energy prices sapping household and business purchasing power,” said
the FOMC statement accompanying the release of the news. “Moreover, inflation pressures remain contained.”

— Posted: Jan. 3, 2001