Fed makes its move — will it be the last?

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Opting for the tamer of two possible moves, the Federal Reserve Board cut rates by one-quarter of a percentage point at its midyear policy-setting meeting. While Fed officials didn’t slash by 50 basis points, as some market-watchers expected, they left the door open to the possibility of further cuts.

The move by the Federal Open Market Committee, which sets interest rate policy for the broader Fed, lowers the key federal funds rate to 3.75 percent from 4 percent. Rates on consumer loans, such as home equity lines of credit, will fall in the wake of the move, as will rates on savings products, such as certificates of deposit. The FOMC also cut the less-important discount rate to 3.25 percent.

For months, policymakers have been grappling with weak spending and investment by businesses.

After gorging themselves on technology equipment and upgrades for the Y2K problem and shoveling billions of Wall Street investment dollars into building communications networks and Internet infrastructure, companies saw their sales dry up late last year and early in 2001.

Until they’re confident the economy will pick up and those kind of capital investments will pay off again, they aren’t likely to resume spending much anytime soon.

At the same time, the consumer side of the economy seems to be doing OK, thanks to the Fed. Anticipation of 2001 Fed cuts caused mortgage rates to plummet in late 2000 and the actual Fed cuts have helped lower rates on loans that people use to buy big-ticket items such as cars and trucks.

Sales of automobiles and new and existing homes are fairly strong as a result, especially considering how many job cuts there have been this year. Many experts say tax cuts and rebate checks that kick in later this summer will help keep the momentum going.

“The patterns evident in recent months — declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad — continue to weigh on the economy,” said the
Fed’s post-meeting statement.

At the same time, officials said inflation remains tame. They also reiterated a statement that suggests their unofficial “bias” is toward cutting rates again.

“The associated easing of pressures on labor and product markets are expected to keep inflation contained,” the statement said.

“Although continuing favorable trends bolster long-term prospects for productivity growth and the economy, the Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.”

The FOMC has now cut rates in six separate steps, two of which came in between scheduled meetings. It next meets on Aug. 21. After that, it has regular gatherings on Oct. 2, Nov. 6 and Dec. 11. Depending on how the economy performs, officials may either already be finished cutting rates or — as their statement suggests — prepared to cut just a bit more.

— Posted: June 27, 2001