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Fed Cuts Rates

In a surprise inter-meeting move, the Federal Reserve cut its target federal funds interest rate by one-half of a percentage point, to 4.5%. The reduction is the Fed's fourth interest rate cut this year.

While noting that business inventories have declined, the Fed's press release cited softening capital investment and "persistent erosion in current and expected profitability," as well as "rising uncertainty about the business outlook." The full text of the press release, from the Federal Reserve's website, is below. For more information on the Federal Reserve, check out our Feature on Alan Greenspan and the Federal Reserve.

Federal Reserve Press Release
The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 4-1/2 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 4 percent.

The FOMC has reviewed prospects for the economy in light of the information that has become available since its March meeting. A significant reduction in excess inventories seems well advanced. Consumption and housing expenditures have held up reasonably well, though activity in these areas has flattened recently. Although measured productivity probably weakened in the first quarter, the impressive underlying rate of increase that developed in recent years appears to be largely intact.

Nonetheless, capital investment has continued to soften and the persistent erosion in current and expected profitability, in combination with rising uncertainty about the business outlook, seems poised to dampen capital spending going forward. This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, threatens to keep the pace of economic activity unacceptably weak. As a consequence, the Committee agreed that an adjustment in the stance of policy is warranted during this extended intermeeting period.

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.

In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Minneapolis, Dallas, and San Francisco.

Chris Rugaber does not own any of the government securities that the Fed will now be buying in order to move the fed funds rate closer to its new target. The Motley Fool is investors writing for investors.

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