Fed reverses stance, but leaves rates alone

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Federal Reserve Board officials left interest rates unchanged at their final meeting of 2000, but strongly hinted rate cuts are on their way soon because of deteriorating economic conditions.

Members of the Federal Open Market Committee, which sets the Fed’s interest rate policy, kept the federal funds rate at 6.5 percent and the federal discount rate at 6 percent. The two rates controlled by the Fed influence market interest rates on banking products such as home equity loans, credit cards and certificates of deposit.

Fed officials began raising rates in June 1999 to cool the economy enough to prevent an inflation outbreak. But now, they seem primarily concerned that growth may be slowing too quickly. They released a statement today warning that the risk of economic weakness outweighs the risk of inflation — a significant shift from just five weeks ago, when they cautioned that inflation was the primary threat.

“The drag on demand and profits from rising energy costs, as well as eroding consumer confidence, reports of substantial shortfalls in sales and earnings, and stress in some segments of the financial markets suggest that economic growth may be slowing further,” according to the post-meeting statement.

“While some inflation risks persist, they are diminished by the more moderate pace of economic activity and by the absence of any indication that longer-term inflation expectations have increased. The Committee will continue to monitor closely the evolving economic situation.”

— Posted: Dec. 19, 2000