Economic Snapshot

1st Quarter 2001

Q2-00 Q3-00 Q4-00 Q1-01
Growth Rate—Real Gross Domestic Product 5.6% 2.2% 1.0% NA*
Inflation Rate—Consumer Price Index 3.0% 3.5% 2.9% 4.2%
Civilian Unemployment Rate 4.0% 4.0% 4.0% 4.2%

*Not available

From Board of Governors, Federal Reserve Systems, through April 13, 2001, adapted by Michael Pakko, economist at the Federal Reserve Bank of St. Louis

Why does the federal funds target rate change?

The goal of the Fed is to promote economic growth without inflation. Economic conditions that indicate inflationary pressures call for the Fed to tighten monetary policy by raising the federal funds target rate. Conversely, when economic weakness appears, the Fed lowers the federal funds target rate in order to encourage economic growth.

Why is there often a difference between the targeted federal funds rate and the actual rate?

Although the Fed has a high degree of influence on the supply of Bank reserves, there are fluctuations and uncertainties on the demand side of the reserves market. For example, in the graph above, when overall demand for reserves was higher than the Fed anticipated, banks bid up the price of those funds, boosting the actual funds rate higher than the target rate.

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