With layoffs mounting and economic growth slowing, the Federal Reserve Board launched its second substantial interest rate cut of the month today, slashing rates one half of a percentage point.
The Fed’s policy-setting group, the Federal Open Market Committee, lowered the federal funds rate to 5.5 percent from 6 percent and the federal discount rate to 5 percent from 5.5 percent.
The funds rate is important because it guides the market rates that banks charge on everything from home equity loans to credit cards and what they pay out in interest on certificates of deposit.
While the Fed just lowered the rate a greater-than-usual 50 basis points four weeks earlier, evidence of economic weakness has continued to mount in January, necessitating another dramatic step. Indeed, economic growth has slowed “close to zero” in Fed Chairman Alan Greenspan’s own words.
“Consumer and business confidence has eroded further, exacerbated by rising energy costs that continue to drain consumer purchasing power and press on business profit margins,” said the FOMC statement accompanying the release of the news. “Partly as a consequence, retail sales and business spending on capital equipment have weakened appreciably. In response, manufacturing production has been cut back sharply, with new technologies appearing to have accelerated the response of production and demand to potential excesses in the stock of inventories and capital equipment.
“Taken together, and with inflation contained, these circumstances have called for a rapid and forceful response of monetary policy.”
Fed members also reiterated a warning that “risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.”
That unofficial bias statement is the most dire of three they can release after each meeting and it signals that more rate cuts are likely in the future.
— Posted: Jan. 31, 2001