Wednesday, January 3, 2001
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Posted at: 8:45 a.m., Wednesday, January 3, 2001

Fed cuts interest rates

By Jeannine Aversa
Associated Press Writer

WASHINGTON The Federal Reserve, faced with a rapidly slowing economy, unexpectedly cut a key interest rate today by one-half point in an effort to avert a serious downturn. It was the first decrease in rates in two years.

Wall Street reacted instantaneously. Within minutes of the Fed’s announcement, the Dow Jones industrial average jumped out of negative territory and roared ahead by more than 300 points. Nasdaq picked up more than 200 points.

The Fed cut its target for the federal funds rate — the interest banks charge each other on overnight loans — to 6 percent from 6.5 percent, a nine-year high.

It also cut its mostly symbolic discount rate by a quarter point to 5.75 percent. The Fed said it stands ready to cut the discount rate by another quarter point to 5.50 percent on the request 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,” the Fed said in a statement.

The rate cut was unusual, occurring between meetings of the central bank’s interest-rate committee. The last time the Fed changed rates between meetings was a quarter-point cut in October 1998, when the central bank was moving aggressively to counter worldwide financial turmoil caused by the Asian currency crisis.

The Federal Open Market Committee, which includes Fed Chairman Alan Greenspan, Fed governors and five of the 12 presidents of Federal Reserve banks, is scheduled to meet Jan. 30-31 to review interest rates.

It was less than a month ago, at its last meeting of 2000, that the central bank switched its chief policy concern from inflation fighting to recession risks. After that announcement, stocks on Wall Street slumped, reflecting disappointment by investors that the Fed had not cut rates

In the part of today’s statement that reflects possible future action, the central bank maintained its December position that the biggest threat to the economy is recession, not inflation.

“The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future,” the Fed said.

The Fed added that inflation pressures “remain contained” and that to date there is “little evidence to suggest that longer-term advances in technology and associated gains in productivity are abating.”

The economy slowed dramatically in the third quarter of 2000, growing at an annual rate of 2.2 percent, the weakest pace in four years. That compared with a sizzling 5.6 percent rate in the second quarter.

More recently, consumer confidence has fallen sharply, the stock market has been volatile, the manufacturing sector is slowing and retail sales have been lackluster.

President-elect Bush, who was holding an economic summit today to get the views of business leaders, has said Congress should pass his massive tax cut “as an insurance policy” against a potential economic downturn. Bush has made the $1.3 trillion reduction in taxes over 10 years the centerpiece of his economic program.

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