A smaller than expected rate cut means that the Fed believes that Recovery/Stagflation are likelier than Recession.
Was this the right decision to make?
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Fed cuts rates by 25 bp to 3.75 percent
June 27, 2001 02:32 PM ET
by Thomas Coyle
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NEW YORK -- The Federal Reserve's Federal Open Market Committee today cut its target for the federal funds rate by 25 basis points, to 3.75 percent.
The Fed said today's action, the sixth rate reduction in less than seven months, was in response to ongoing weakness in the U.S. economy.
The FOMC's reasoning
"The patterns evident in recent months -- declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad -- continue to weigh on the economy," the FOMC said in a press statement.
The FOMC left the door wide open to further cuts, saying that economic risk is "weighted mainly toward conditions that may generate economic weakness in the foreseeable future."
Background
Today's move is a continuation of the Fed's money-loosening policy, initiated on Jan. 3 of this year, in response to slowing demand, especially for manufactured products -- a category that includes high-technology goods such as communication equipment and computer hardware.
Subsequent to the FOMC's surprise move on Jan. 3, when it trimmed rates by an aggressive 50 basis points to 6 percent, the central bank has cut rates five more times -- in all but the latest occasion in increments of 50 basis points, bringing the Fed's total cuts so far this year to 275 basis points.
Market reaction
Stocks, which had been mildly buoyant in anticipation of the Fed's announcement, fell on the news of the quarter-point cut.
At 2:32 p.m. ET, the Nasdaq Composite Index was down 4.32, or 0.21 percent, to 2,060.30.
The Dow Jones industrial average was down 32.00, or 0.31 percent, to 10,440.48.
The market's widest gauge, the Wilshire Total Market Index, was down 36.30, or 0.32 percent to 11,217.98. |
