In what’s expected to be the last in a series of cuts in short-term interest rates for now, the Federal Reserve today cut its target for the federal funds overnight rate by 25 basis points, to 2 percent — the lowest level since 2004.
Two members of the Federal Open Market committee voted against the move, saying that it was time to end a series of cuts and leave the rate banks charge each other to lend money overnight at 2.25 percent.
Having brought the federal funds rate down from 5.25 percent in seven consecutive meetings since September, the Federal Reserve is now widely expected to step back and assess the impact of those cuts.
"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity," committee members said in a statement.
While lowering short-term interest rates stimulates the economy by encouraging borrowing, it can also weaken the dollar and fuel inflation.
The committee said it expects inflation to moderate in coming quarters, but that "uncertainty about the inflation outlook remains high" and the Fed will continue to monitor inflation developments carefully.
Eight members of the committee, including Federal Reserve Chairman Ben Bernanke, voted to cut the federal funds rate by 25 basis points, compared with previous cuts of 50 or 75 basis points (one basis point is one hundredth of a percent). Two members, Richard Fisher and Charles Plosser, were against making even that modest reduction.
At 2 percent, the target for the federal funds rate is at its lowest level since December 2004 (see historical chart).
Although the Federal Reserve does not set the federal funds rate directly, it can keep the rate near its target by adjusting the money supply. Lower short-term interest rates can provide relief for borrowers with adjustable-rate mortgages, but do not directly affect long-term interest rates such as 30-year fixed-rate mortgages.
In a related move, the Board of Governors of the Federal Reserve today unanimously approved a 25-basis-point reduction in the discount rate, to 2.25 percent. The discount rate is the rate the government charges to make short-term loans to banks.
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