January 3, 31, 2001
Statement·Presser·Minutes·Policy
AGAlan GreenspanJanuary 31, 2001 FOMC Statement
FOMC statement
FOMC statement and Board discount rate action
For immediate release
The Federal Open Market Committee decided at its meeting today decided to lower its target for the federal funds rate by 50 basis points to 6 5-1/2 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 5 percent.
Consumer and business confidence has eroded further, exacerbated by rising energy costs that continue to drain consumer purchasing power and press on business profit margins. Partly as a consequence, retail sales and business spending on capital equipment have weakened appreciably. In response, manufacturing production has been cut back sharply, with new technologies appearing to have accelerated the response of production and demand to potential excesses in the stock of inventories and capital equipment.
Taken together, and with inflation contained, these circumstances have called for a rapid and forceful response of monetary policy. The longer-term advances in technology and accompanying gains in productivity, however, exhibit few signs of abating and these gains, along with the lower interest rates, should support growth of the economy over time.
The Nonetheless, the Committee continues to believe that, 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 New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, Minneapolis, Dallas and San Francisco.
In a related action, the Board of Governors approved a 25-basis-point decrease in the discount rate to 5-3/4 percent, the level requested by seven Reserve Banks. The Board also indicated that it stands ready to approve a further reduction of 25 basis points in the discount rate to 5-1/2 percent on the requests of Federal Reserve Banks.
These actions were taken in light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets, and high energy prices sapping household and business purchasing power. Moreover, inflation pressures remain contained. Nonetheless, to date there is little evidence to suggest that longer-term advances in technology and associated gains in productivity are abating.
Our summary
What changed
- Cut the federal funds rate by 50 basis points to 5-1/2 percent, same size as the previous cut but to a lower level.
- Reduced the discount rate by 50 basis points to 5 percent, a larger cut than the prior 25-basis-point decrease.
- Dropped the prior commitment to consider a further 25-basis-point discount rate cut, indicating a more decisive easing stance.
- Strengthened the economic outlook language, citing eroded confidence, rising energy costs, and sharp production cutbacks, while noting inflation remains contained.
- Expanded the list of Reserve Banks requesting the discount rate action from seven to nine, adding Philadelphia, Chicago, and Minneapolis.
Implications
The larger discount rate cut and removal of the conditional further reduction signal a more aggressive easing bias, suggesting the FOMC is prepared to act forcefully to counter economic weakness.
The emphasis on rapid response and contained inflation implies that further rate cuts are likely if conditions deteriorate, with markets likely to interpret the statement as dovish.
Summary generated automatically from the statements. Not investment advice.