FED cuts key interest rate by half-point in effort to cushion fallout from terror attacks

Tuesday, November 6th 2001, 12:00 am
By: News On 6

WASHINGTON (AP) _ The Federal Reserve cut a key interest rate Tuesday by a half-point, its latest effort to rescue a U.S. economy battered by the terror attacks and edging toward recession.

The Fed's cut is the 10th this year. In the aftermath of the Sept. 11 attacks, consumer confidence has plunged, unemployment has soared and manufacturing, the weakest part of the economy, has sunk deeper into its own recession.

Economists are hopeful lowering borrowing costs will persuade consumers and businesses to spend and invest, which would prevent further weakening of the economy.

After a closed-door meeting, Federal Reserve Chairman Alan Greenspan and his colleagues announced they were cutting the target for the federal funds rate, the interest banks charge each other on overnight loans, to 2 percent, the lowest since September 1961.

In response, commercial banks were expected to reduce their prime lending rates, the benchmark for millions of consumer and business loans, by a similar half-point to 5 percent, the lowest level since June 25, 1972.

``Heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity,'' the Fed said in a statement.

On Wall Street, stocks edged up. A half-hour after the Fed announcement, the Dow Jones industrial average was up 30 points; just before the Fed acted, it was down 50 points.

In the part of the statement that reflects possible future action, policy-makers held the door open to further rates cuts.

``The risks are weighted mainly toward conditions that may generate economic weakness,'' the Fed said.

The European Central Bank and the Bank of England are also expected to lower interest rates later in the week in an attempt to ward off what appears to be a simultaneous global recession.

The Fed also cut its discount rate, the interest that the Fed charges to make direct loans to banks, by a half-point to 1.50 percent.

Against a backdrop of plunging consumer confidence and soaring unemployment, economists worry that the economic picture might get a lot worse before it gets better.

A big fear is that consumers, whose spending accounts for two-thirds of all economic activity, will continue to cut back as the job market deteriorates, further undercutting a weak economy.

Tuesday's half-point cut to the federal funds rate marked the third cut of that size since the terror attacks. The Fed had previously cut rates on Sept. 17 and Oct. 2.

Many economists say the Fed's aggressive credit easing probably won't avert a recession this year. But they are hopeful the action will prevent any downturn from being drawn out.

The economy _ which had been growing weakly for more than a year _ shrank at a 0.4 percent annual rate, as measured by the gross domestic product, in the July-September quarter, the government reported last week. Analysts predict the current quarter will show an even larger contraction. A common definition of recession is two consecutive quarters of declining GDP.

Fallout from the terrorist attacks was evident in a spate of other dismal economic reports released last week:

_Consumer confidence plunged to a 7 1/2 -year low in October.

_U.S. unemployment soared from 4.9 percent to 5.4 percent in October and 415,000 jobs were eliminated during the month, the biggest one-month decline in 21 years.

_Manufacturing activity in October plunged to its lowest level since February 1991, when the country was mired in its last recession.

_Consumers cut back on spending in September by the largest amount in nearly 15 years.

Adding to the economic uncertainty is the threat of new terrorist attacks and increasing worries about anthrax contamination in the mail.

Still, economists are hopeful the economy will rebound in the second half of next year.

They are counting on the Fed's sizable rate cuts, President George W. Bush's earlier tax-cut package and as much as dlrs 100 billion in new economic stimulus being contemplated by Congress to jolt the economy back to a healthy pace of growth.