Fed Cuts Short-Term Rates By 50 Basis Points

By BridgeNews The Federal Reserve announced it has cut its key federal funds rate target by 50 basis points and its discount rate by 50 basis points. The Fed made the unusual move of cutting interest rates between regularly scheduled monetary policy meetings following last week's terrorist attacks in New York and Washington, and on the morning of the reopening of U.S. equity trading, which was halted for most of last week. The actions bring the federal funds rate target and the discount rate down to 3%. The Fed's rate decrease was announced two weeks before the Fed's next scheduled monetary policy meeting on Oct. 2. In its announcement, the Fed promised to "continue to supply unusually large volumes of liquidity to the financial markets, as needed, until more normal market functioning is restored." In addition, the Fed also said the fed funds rate may fall "below its target on occasion in these unusual circumstances." The last time the Fed decided to change monetary policy between regularly scheduled meetings was on Jan. 3, when the Fed surprised financial markets by cutting rates one-half percentage point in reaction to a dramatic and swift weakening in economic conditions. Until this year, inter-meeting rate changes had been rare since the Fed began its practice of announcing adjustments in its federal funds rate target in 1994. Prior to the Jan. 3 rate cut, the last time the Fed decided to shift monetary policy between FOMC meetings was on Oct. 15, 1998, during the height of a global financial crisis. The Fed also raised rates between meetings in 1994. Even though the Fed continued to say risks pointed toward further economic weakness, the statement provided some hope, stating that the "long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate."

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