Federal Reserve Group Lowers Interest Rates Half Point

17 September 2001

Federal Reserve Group Lowers Interest Rates Half Point

FOMC cites unusual circumstances after terrorist attacks

Just before trading resumed on U.S. financial markets September 17, the policy-setting group of the Federal Reserve announced another half-point cut in interest rates.

The cut announced by the Federal Open Market Committee (FOMC) brought down the federal funds rate, the interest rate banks charge each other for overnight loans, to 3 percent, the lowest since February 1994.

Similarly, the Federal Reserve cut its discount rate, the interest rate it charges banks for overnight loans, one half point to 2.5 percent.

"The Federal Reserve will continue to supply unusually large volumes of liquidity to the financial markets, as needed, until more normal market functioning is restored," the FOMC statement said.

Citing continued weakness in the U.S. economy even before September 11, the FOMC statement indicated that terrorist attacks on the World Trade Center and Pentagon could hurt spending further. Even so, the FOMC said long-term prospects for the economy still look good.

The FOMC members acted for the third time in 2001 to cut interest rates between their regularly scheduled meetings; their next meeting is scheduled October 2. Since January 3 the Federal Reserve has reduced interest rates by four percentage points.

Following is the text of the FOMC's statement:

Press Release
FOMC statement and Board discount rate action
September 17, 2001

The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 3 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 2-1/2 percent. The Federal Reserve will continue to supply unusually large volumes of liquidity to the financial markets, as needed, until more normal market functioning is restored. As a consequence, the FOMC recognizes that the actual federal funds rate may be below its target on occasion in these unusual circumstances.

Even before the tragic events of last week, employment, production, and business spending remained weak, and last week's events have the potential to damp spending further. Nonetheless, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate. For the foreseeable future, 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 taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Richmond, Chicago, Minneapolis, Dallas, and San Francisco.