The Federal Open Market Committee at its meeting decided to lower its target for the federalfunds rate by 50 basis points to 4 percent. In a related action, the Board of Governors approveda 50 basis point reduction in the discount rate to 3-1/2 percent. A significant reduction in excess inventories seems well advanced. Consumption and housingexpenditures have held up reasonably well, though activity in these areas has flattened recently.Investment in capital equipment, however, has continued to decline. The erosion in current andprospective profitability, in combination with considerable uncertainty about the business outlook,seems likely to hold down capital spending going forward. This potential restraint, together withthe possible effects of earlier reductions in equity wealth on consumption and the risk of slowergrowth abroad, continues to weigh on the economy. With pressures on labor and product markets easing, inflation is expected to remain contained.Although measured productivity growth stalled in the first quarter, the impressive underlying rateof increase that developed in recent years appears to be largely intact, supporting longer-termprospects. The Committee continues to believe that against the background of its long-run goals of pricestability and sustainable economic growth and of the information currently available, the risks areweighted mainly toward conditions that may generate economic weakness in the foreseeablefuture. In taking the discount rate action, the Federal Reserve Board approved requests submitted bythe Boards of Directors of the Federal Reserve Banks of New York, Richmond, Chicago, St.Louis and San Francisco.