The Federal Open Market Committee at its
meeting today 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