Fed Slashes Rates a Half Percent; May Now Stand Pat

November 6, 2002 (PLANSPONSOR.com) - The Federal Reserve cut short-term interest rates by an aggressive half percentage point for the first time this year in a bid to stimulate growth, but sent a sign that it may be less inclined to do so in the future.

The Federal Open Market Committee (FOMC) decided to drop its target for the federal funds rate by 0.5% to 1.25%. The federal funds rate is what banks charge each other for overnight loans.  The FOMC chopped rates 11 times in 2001 — the last time on December 11. (See  Fed Cuts Rates by 0.5% ).

The Fed acknowledged consumer uncertainty – in part over pending war with Iraq – is holding back spending, production and unemployment. However, the Fed’s easing and the economy’s productivity gains should continue to support overall economic growth, the FOMC said.

“Today’s additional monetary easing should prove helpful as the economy works its way through this current soft spot,” the Fed commented in making its rate cut announcement.

With the new interest rate level, FOMC members said they believe inflation risks and risk of further economic weakness are balanced for the foreseeable future. ( The Fed’s News Release ) Many Fed watchers said after the announcement that they believe the FOMC was trying to caution Americans not to expect additional cuts anytime soon.

The central bank also dropped its discount rate a half percentage point to 0.75%.