Specifically, the Federal Open Market Committee, the central bank's top policymaking group, cut its target for the federal funds rate to 5.25 percent from 5.5 percent. At the same time, the Fed Board, all of whose members also are on the FOMC, reduced the discount rate to 5 percent from 5.25 percent. The federal funds rate is the interest rate financial institutions charge each other on overnight loans. The discount rate is the interest rate Federal Reserve banks charge on loans to financial institutions. Some other analysts speculated that the FOMC may have been concerned enough about maintaining growth to have given Fed Chairman Alan Greenspan extra authority to reduce rates again between now and the next meeting if circumstances warrant such a move.
Lower rates can help growth by making it less costly to borrow.
That could encourage consumers, many of whom already have big debts, to borrow more to buy items such as new cars, appliances and homes. It was not clear how yesterday's action will help home sales, and therefore new home construction, because home mortgage rates already had declined significantly without sparking much more buying. The failure of long rates to drop was attributed by some analysts to investor concerns that lower interest rates make higher inflation more likely. As for new car sales, some auto industry executives praised the Fed's move and said it could boost sales by 200,000 vehicles this year. Industry analysts predict automakers will sell as many as 15.3 million new cars and trucks this year, only slightly better than the 15.1 million sold in the United States last year and not as many as 1994's 15.4 million.