FEDERAL OPEN MARKET COMMITTEE ACTIONS AND CHANGES IN THE DISCOUNT RATE.
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.
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 New York, Cleveland, Atlanta, St. Louis, Kansas City, Dallas, and San Francisco.
Completing action initiated on January 3, 2001, the Board of Governors on January 4 approved a discount rate of 5 1/2 percent, acting on requests submitted by the boards of directors of all twelve Reserve Banks.
On January 3, in conjunction with the Federal Open Market Committee's decision to lower the federal funds rate target by 50 basis points, the Board approved pending requests from Federal Reserve Banks to reduce the discount rate by 25 basis points, to 5 3/4 percent, and said that it would approve a further 25 basis point reduction once the Reserve Banks submitted requests.
The discount rate is the rate charged depository institutions when they borrow short-term adjustment credit from their District Federal Reserve Banks. The rate change was effective immediately except in the St. Louis District, where the rate became effective as of Friday, January 5, 2001.
The Federal Open Market Committee at its meeting on January 31, 2001, decided to lower its target for the federal funds rate by 50 basis points to 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.
Nonetheless, 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 New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco. The Board subsequently approved similar requests submitted by the boards of directors of the Federal Reserve Banks of Boston and Richmond, effective January 31, and by the board of directors of the Federal Reserve Bank of Kansas City, effective February 1.
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|Publication:||Federal Reserve Bulletin|
|Article Type:||Brief Article|
|Date:||Mar 1, 2001|
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