*EPF307 11/06/2002
Text: U.S. Federal Reserve Bank Cuts Key Interest Rates
(Move in response to economic, political uncertainty) (610)

The policy-setting body of the Federal Reserve, the United States' central bank, decided to lower key interest rates, taking action on rates for the first time in 2002.

The Federal Open Market Committee (FOMC) announced after it met November 6 that it has reduced the federal funds interest rate -- the interest that banks charge each other on overnight loans -- by 0.50 percent to 1.25 percent. In six previous meetings in 2002 the FOMC left interest rates unchanged after cutting the overnight rate 11 times in 2001.

In a related action, the Board of Governors slashed the discount rate -- the interest banks are charged when they borrow from the Federal Reserve -- by 0.50 percent to 0.75 percent, the committee statement said.

The FOMC said that an "accommodative" stance of monetary policy, a policy to keep rates low enough to help the economy grow, coupled with "still-robust" productivity growth, is providing significant support to economic activity. Economic data, however, have "tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production and employment", the committee added.

Some private economists expressed a belief that concerns about a possible war with Iraq and more terrorist attacks might have dampened consumers' willingness to spend and businesses' eagerness to invest and hire, according to news reports.

The FOMC said that the November 6 action should be "helpful" as the economy "works its way through this current soft spot."

Economic data do not indicate clearly where the U.S. economy is heading. While gross domestic product (GDP) annual growth rate in the third quarter was almost two-and-half times higher than in the second quarter, latest economic indicators signaled that the expansion might be slowing. In October unemployment rose and spending on new plants and other commercial buildings fell, according to the Labor and Commerce departments. And the Conference Board, an independent research organization, reported that a consumer confidence index had dropped to a nine-year low.

On the other hand, new home sales, single-family homes construction and productivity continued to rise in the same month, according to Treasury official Mark Warshawsky.

Following is the text of the FOMC statement:

(begin text)

November 6, 2002

The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 1 1/4 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 3/4 percent.

The Committee continues to believe that an accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, is providing important ongoing support to economic activity. However, incoming economic data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production, and employment. Inflation and inflation expectations remain well contained.

In these circumstances, the Committee believes that today's additional monetary easing should prove helpful as the economy works its way through this current soft spot. With this action, the Committee believes 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 balanced with respect to the prospects for both goals in the foreseeable future.

Voting for the FOMC monetary policy action were Alan Greenspan, Chairman; William J. McDonough, Vice Chairman; Ben S. Bernanke, Susan S. Bies; Roger W. Ferguson, Jr.; Edward M. Gramlich; Jerry L. Jordan; Donald L. Kohn, Robert D. McTeer, Jr.; Mark W. Olson; Anthony M. Santomero, and Gary H. Stern.

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 Dallas and New York.

(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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