The Federal Open Market Committee decided to lower the target for the federal funds rate (the interest banks charge each other on overnight loans) by half a percent (50 basis points) to 2%. The Board of Governors approved the same cut in the discount rate (the interest rate the Fed charges to make direct loans to banks) to 1.5%.
The half-point cut in the federal funds rate marked the third cut of that size since the September terror attacks. The Fed had previously cut rates on Sept. 17 and Oct. 2.
In a written statement the Fed said it was cutting rates due to “heightened uncertainty and concerns about a deterioration in business conditions both here and abroad [that] are damping economic activity.”
However, officials were also encouraged about the prospects of the economy down the road, saying, “[although] the necessary reallocation 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."
The cut in the federal funds rate is the lowest the lowest since September 1961. Commercial banks are expected to also reduce their prime lending rates, the benchmark for millions of consumer and business loans, by a similar half-point to 5%, the lowest level since June 25, 1972.
The general consensus among many economists is that today’s move by the Fed won’t avert a recession, but they believe it will keep if from being drawn out long into next year.