Translating what the Fed said
By Holden Lewis • Bankrate.com
Announcements by the Federal Reserve Board can influence a consumer's cost of living -- but it's tough for laymen to understand what the announcements mean. Here's a plain-language translation of what the Fed's key rate-setting committee said in its Dec. 11 announcement.
The Fed said:
The Federal Open Market Committee decided today to lower its target
for the federal funds rate by 25 basis points to 1-3/4 percent. In a related
action, the Board of Governors approved a 25 basis point reduction in the
discount rate to 1-1/4 percent.
What that means:
The Federal Open Market Committee decided to add enough cash into the
banking system to lower the banks' overnight lending rate by a quarter
of a percentage point, to 1.75 percent. The Federal Reserve also lowered
the less-important rate by which banks borrow directly from the Fed by
a quarter of a percentage point, to 1.25 percent.
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The Fed said:
Economic activity remains soft, with underlying inflation likely to
edge lower from relatively modest levels. To be sure, weakness in demand
shows signs of abating, but those signs are preliminary and tentative.
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.
What that means:
Economic activity remains soft, with inflation likely to drop even
lower. Consumers and businesses are showing signs of buying more, but those
signs are preliminary and tentative; they could reverse. The committee
wants to help the economy grow while fighting inflation. Right now, based
on the information we have, the problem isn't inflation. The problem is
maintaining economic growth. We're prepared to lower interest rates again
to spark economic growth.
This is the all-important "bias statement" that signals which way the
Fed is leaning in its rate policy.
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The Fed said:
Although the necessary re-allocation of resources to enhance security
may restrain advances in productivity for a time, the long-term prospects
for productivity growth and the economy remain favorable and should become
evident once the unusual forces restraining demand abate.
What that means:
For a while, governments and businesses will have to hire or reassign
people to work as guards and police. It will cost money and take time to
train and deploy these people. Instead of making things or serving customers,
they'll perform the necessary but less productive function of providing
protection. In the long run, we expect Americans to be more productive
and for the economy to do fine.
(This Fed issued an identically worded paragraph when it cut rates Nov.
6.)
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The Fed said:
In taking the discount rate action, the Federal Reserve Board approved
the requests submitted by the Boards of Directors of the Federal Reserve
Banks of Boston, New York, Philadelphia, Chicago and San Francisco.
What that means:
When the Federal Reserve Board cut the less-important discount rate,
it was in response to requests from five of the nation's 12 Federal Reserve
banks. In November, the Fed lowered the discount rate at the request of
just one of the Federal Reserve banks. The Fed usually keeps the discount
rate about a half-point below the overnight rate.