Fed Slashes Rates to Four Decade Lows

June 25, 2003 (PLANSPONSOR.com) - Admitting that the US economy "has yet to exhibit sustainable growth," the US Federal Reserve Wednesday slashed the trend-setting federal funds rate by 0.25% to its lowest level in 45 years.

The latest move by the Federal Open Market Committee (FOMC) represented the 13 th interest cut since January 2001 and takes the federal funds rate to 1%. The rate, charged for overnight loans between banks, has been at 1.25% since November 2002.

At the same time, the Fed slashed the discount rate – charged by the Fed for loans to member banks – by 0.25% to 2%.

While admitting that the long slumbering US economy has yet to show long-term sea legs, Fed officials were quick to point out areas of potential encouragement. “The (FOMC) continues to believe that an accommodative stance of monetary policy, coupled with still underlying growth in productivity, is providing important ongoing support to economic activity,” the officials said in their customary post-FOMC meeting announcement. “Recent signs point to a firming in spending, markedly improved financial conditions, and labor and product markets that are stabilizing. With inflationary expectations subdued, the (FOMC) judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time.”

The forces supporting sustainable growth are about the same as those making such growth less likely, with deflation being likely to stick around in the short term, Fed governors said in the statement.

The Fed’s Wednesday rate cuts were widely expected. Wall Street dealers surveyed by Reuters last week were unanimous in anticipating a reduction by either a quarter or a half percentage rate. Separately, a lmost all economists surveyed by Bloomberg News expected a Fed cut with 97 of the more than 150 forecasting a quarter-point rate reduction and 48 predicting a half-point cut. The latest Fed statement is at  http://www.federalreserve.gov/boarddocs/press/monetary/2003/20030625/default.htm .

At its most recent meeting in May, the Fed left rates unchanged (See   Fed Holds Steady On Rates, Warns of ‘Weakness’ ).