*EPF314 06/27/01
Text: Federal Reserve Cuts Interest Rates by Quarter Point
(Rates now at lowest level in seven years) (440)

The Federal Reserve's policy-making group, called the Federal Open Market Committee (FOMC), has voted to reduce interest rates .25 percentage point following five 0.5-point cuts since the beginning of the year.

The FOMC's June 27 decision brings the federal funds rate, the rate banks charge each other for overnight loans, to 3.75 percent, the lowest rate since May 1994.

Citing continuing weaknesses in U.S. business profits and capital spending, U.S. consumption and foreign economic performance, the FOMC said "the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."

FOMC members said they expect weak economic performance to continue containing inflationary pressures.

Economists typically predict that changes in interest rates take six to nine months to effect changes in the economy. The first rate cuts were made in January, but so far the U.S. economy shows few signs of responding; production at factories, mines and utilities has declined for eight months in a row.

The FOMC also cut by .25 point the discount rate, the rate the Federal Reserve charges its member banks for overnight loans, to 3.25 percent.

Following is the text of the Federal Reserve press release:

(begin text)

The Federal Open Market Committee at its meeting today decided to lower its target for the federal funds rate by 25 basis points to 3-3/4 percent. In a related action, the Board of Governors approved a 25 basis point reduction in the discount rate to 3-1/4 percent. Today's action by the FOMC brings the decline in the target federal funds rate since the beginning of the year to 275 basis points.

The patterns evident in recent months -- declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad -- continue to weigh on the economy. The associated easing of pressures on labor and product markets is expected to keep inflation contained.

Although continuing favorable trends bolster long-term prospects for productivity growth and the economy, 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, Atlanta, Chicago, Dallas and San Francisco.

(end text)

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)
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