Announcements by the Federal Reserve Board can influence a consumer’s cost of living, but it’s tough for laymen to understand what the announcements mean. Here’s a plain-language translation of what the Fed’s key rate-setting committee said in its
Nov. 6 announcement.

What the Fed said:
The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 2 percent. In a related action, the Board of Governors approved a 50-basis-point reduction in the discount rate to 1.5 percent.

What that means in English:

The Federal Open Market Committee decided to add enough cash into the banking system to lower the banks’ overnight lending rate by half a percentage point, to 2 percent. The Federal Reserve also lowered the less-important rate by which banks borrow directly from the Fed by half a percentage point, to 1.5 percent.

What the Fed said:
Heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity. For the foreseeable future, then, 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.

What that means in English:
Consumers and businesses are uncertain about the future and worried about the overall economy here and abroad, so they’re not spending and investing as much as they used to. The committee wants to help the economy grow while fighting inflation. Right now, based on the information we have, the problem isn’t inflation. The problem is maintaining economic growth. We’re prepared to lower interest rates again to spark economic growth.

What the Fed said:
Although the necessary reallocation of resources to enhance security may restrain advances in productivity for a time, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate.

What that means in English:
For a while, governments and businesses will have to hire or reassign people to work as guards and police. It will cost money and take time to train and deploy these people. Instead of making things or serving customers, they’ll perform the necessary but less-productive function of providing protection. In the long run, we expect Americans to be more productive and for the economy to do fine.

What the Fed said:
In taking the discount-rate action, the Federal Reserve Board approved the request submitted by the Board of Directors of the Federal Reserve Bank of Richmond.

What that means in English:
When the Federal Reserve Board cut the less-important discount rate, it was in response to requests from one of the nation’s 12 Federal Reserve banks. The Fed usually keeps the discount rate about a half-point below the overnight rate.

— Posted: Nov. 6, 2001