Dateline: 03/20/01

Hoping to keep the US from falling deeper into an economic slowdown bordering on a full-out recession, the Federal Open Market Committee of the Federal Reserve Board voted today to lower the key interest rate by one-half of a percentage point. 

The big question now is how Wall Street will react to this cut, already the third in 2001. Many stock investors, already hard-hit lately by big drops in both the New York Stock Exchange and the NASDAQ, had favored a three-quarter point cut.

Minutes after the cut was announced at about 2:10 pm ET, both the New York and NASDAQ exchanges began a generally downward slide. However, market analysts advised that this trend may turn around and be offset by gains later in the week.

Some financial analysts have blamed the slowing economy on a record period of stock ownership by Americans coming at the same time as dropping stock prices. The slowdown comes after 10 straight years of economic growth in America.

Economists now hope that lower interest rates will not only invigorate the stock market, but lower the costs of home mortgages, credit card payments and loans for major consumer items -- all factors that would stimulate the economy.

By raising or lowering the interest rate, the Federal Reserve attempts to affect the nationwide demand for goods and services by both companies and individuals.

Changes in real interest rates affect the public's demand for goods and services mainly by altering borrowing costs, the availability of bank loans, the wealth of households, and foreign exchange rates.

Lower interest rates also tend to increase stock prices. People who own stocks thus find that the value of their holdings has gone up, and this increase in wealth makes them willing to spend more. Higher stock prices also make it more attractive for businesses to invest in plant and equipment by issuing stock.

The White House has indicated that the Bush Administration will have no immediate response to today's action of the Federal Reserve.

The Federal Open Market Committee (FOMC) of the Federal Reserve, under chairman Alan Greenspan, is responsible for formulating policies designed to promote economic growth, full employment and stable consumer prices within the United States.

"The FOMC makes key decisions regarding the conduct of open market operations — purchases and sales of U.S. Government and Federal Agency securities — which affect the provision of reserves to depository institutions and, in turn, the cost and availability of money and credit in the U.S. economy. The FOMC also directs System operations in foreign currencies." -- Federal Open Market Committee