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
Dec. 11 announcement.

The Fed said:
The Federal Open Market Committee decided today to lower its target for the federal funds rate by 25 basis points to 1-3/4 percent. In a related action, the Board of Governors approved a 25 basis point reduction in the discount rate to 1-1/4 percent.

What that means:
The Federal Open Market Committee decided to add enough cash into the banking system to lower the banks’ overnight lending rate by a quarter of a percentage point, to 1.75 percent. The Federal Reserve also lowered the less-important rate by which banks borrow directly from the Fed by a quarter of a percentage point, to 1.25 percent.


The Fed said:
Economic activity remains soft, with underlying inflation likely to edge lower from relatively modest levels. To be sure, weakness in demand shows signs of abating, but those signs are preliminary and tentative. 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.

What that means:
Economic activity remains soft, with inflation likely to drop even lower. Consumers and businesses are showing signs of buying more, but those signs are preliminary and tentative; they could reverse. 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.

This is the all-important “bias statement” that signals which way the Fed is leaning in its rate policy.


The Fed said:
Although the necessary re-allocation 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:
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.

(This Fed issued an identically worded paragraph when it cut rates Nov. 6.)


The Fed said:
In taking the discount rate action, the Federal Reserve Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Chicago and San Francisco.

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

— Posted: Dec. 11, 2001