*EPF312 04/18/01
Text: Federal Reserve Acts to Cut Interest Rates
(Fed reduces rates by half percentage point) (540)

Citing economic weakness, the Federal Reserve for the second time this year acted to lower interest rates between the meetings of the policy-making Federal Open Market Committee (FOMC) where such decisions are normally made.

The Federal Reserve announced April 18 that the FOMC had decided to lower the target for the federal funds rate -- what banks charge each other for overnight loans -- to 4.5 percent from 5 percent. This is the fourth consecutive half point reduction since January 3. The Federal Reserve also approved a half point lowering of the discount rate to 4 percent. This is the rate the Federal Reserve charges for its daily loans to private banks and other financial institutions. The two rates are the Federal Reserve's most visible tools in its conduct of monetary policy to influence the U.S. economy. The federal funds rate is the more important of the two.

In an April 18 press release, the FOMC cited several factors acting to slow capital spending, which together with effects of diminished equity wealth on consumption and slower growth abroad "threaten to keep the pace of economic activity unacceptably weak."

The next FOMC meeting is on May 15. The FOMC meets eight times a year.

Following is the text of the Federal Reserve's press release:

(begin text)

The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 4-1/2 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 4 percent.

The FOMC has reviewed prospects for the economy in light of the information that has become available since its March meeting. A significant reduction in excess inventories seems well advanced. Consumption and housing expenditures have held up reasonably well, though activity in these areas has flattened recently. Although measured productivity probably weakened in the first quarter, the impressive underlying rate of increase that developed in recent years appears to be largely intact.

Nonetheless, capital investment has continued to soften and the persistent erosion in current and expected profitability, in combination with rising uncertainty about the business outlook, seems poised to dampen capital spending going forward. This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, threatens to keep the pace of economic activity unacceptably weak. As a consequence, the Committee agreed that an adjustment in the stance of policy is warranted during this extended intermeeting period.

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.

In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Minneapolis, Dallas, and San Francisco.

(end text)

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