Fed Cuts Fund Rate to Below Real Interest Rate

October 2, 2001 (PLANSPONSOR.com) - The Federal Reserve cut its target for the federal funds rate by 0.5%, reducing interest rates below the core inflation rate for the first time since the early nineties.

The target, which was lowered by half a percentage point to 3% shortly after the events of September 11 in an attempt to stimulate spending and keep the economy from going into a freefall, now stands at 2.5%.

The half point cut, in line with market expectations which saw stocks rise in early afternoon trading, brings the fed funds target rate to its lowest level in 39 years.

August’s 2.7% core inflation rate, places real interest rates, a better indicator of money supply at zero or slightly negative.

But while the cut may give a boost to the equity markets and encourage consumers to spend, the benefits come at the cost of an increased risk of inflation. And many believe that the cuts don’t go far enough, arguing that increased government spending and further tax cuts are necessary.

The Fed’s press release