Interest Rate Remains Steady Amid Discouraging Economic Data
At a policymaking meeting today, Federal Reserve Chairman Alan Greenspan and officials from the Federal Open Market Committee, the central bank’s top policymaking body, decided to hold the federal funds interest rate — a rate banks charge each other on overnight loans — at 1.75 percent, its lowest level in 41 years.
It marked the sixth consecutive time this year in which Fed officials opted to not alter interest rates. Through lowering interest rates, policy-makers hope to encourage consumers and businesses to increase spending, which would serve to stimulate the economy.
The Fed, led by Greenspan, issued a statement saying recent economic data suggested that consumer and business demand is “growing at a moderate pace.”
“Over time … the current accommodative stance of monetary policy, coupled with still robust underlying growth in productivity, should be sufficient to foster an improving business climate,” the FOMC’s statement said, meaning the group believes the central bank’s current interest rate along with expected productivity gains should spur economic recovery.
The Fed cautioned “considerable uncertainty persists about the extent and timing of the expected pickup in production and employment owing in part to the emergence of heightened geopolitical risks” — referring to growing concerns over a possible war with Iraq.
For the majority of consumers, the Fed’s decision means that commercial banks’ prime lending rate — which serves as the benchmark for many loans — will also remain at 4.75 percent, the lowest level since November 1965.
Two of the twelve Fed members, Edward Gramlich and Robert McTeer, dissented with the central bank’s decision, arguing interest rates needed to be lowered further amid increasingly sluggish economic recovery.
The FOMC plans to meet next on Nov. 6 and again on Dec. 10.
The Fed’s decision to hold the interest rate steady came on the heels of two studies showing lackluster economic news.
Conference Board officials said consumer confidence fell for the fourth consecutive month, slipping to 93.3 this month from 94.5 last month. Consumer spending accounts for two-thirds of economic activity in the United States, according to Conference Board data.
In its annual report on income and poverty, also released Tuesday, the U.S. Census Bureau said that real median income tumbled 2.2 percent from last year, while the poverty rate rose to 11.7 percent.
According to its data, 32.9 million Americans were living in poverty last year, up from 31.6 million in 2000. The rate of 11.7 percent was up from 11.3 percent the previous year, which was the lowest level since 1974.
The Census Bureau calculates the poverty threshold depending on the size of the household; the poverty level for family of four in 2001 was $18,104.
The median household income — as adjusted for inflation — dropped by 2.2 percent last year to $42,228, the first decline since 1991.
Daniel Weinberg, chief of the Census Bureau’s economic statistics division, said every region saw a decline in median household income except in the Northeast, where it remained flat.
All measures of income inequality rose last year, reversing gains made in the latter half of the 1990s.
This triple dosage of weak economic news quelled any possible gains on Wall Street.
The Dow Jones industrial average slipped by 2.4 percent, to a new four-year low, while the Nasdaq composite index fell 2.79 points, to a new six-year low. The Standard & Poor’s 500 index dipped by 1.7 percent, yet above the five-year low it hit in July.