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Fed likely to cut again
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October 1, 2001: 12:38 p.m. ET
Central bank may cut rates to 40-year lows in effort to fend off recession
By Staff Writer Mark Gongloff
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NEW YORK (CNNfn) - When Federal Reserve policy makers meet Tuesday to discuss cutting interest rates, the only mystery about the outcome will be the size of the cut and whether or not they'll cut rates again.
In the wake of the Sept. 11 terrorist attacks on New York and Washington that triggered fears of recessions in the United States and other countries, the U.S. central bank accelerated its already aggressive rate-cutting campaign.
Six days after the attacks, the Fed slashed its target for the federal funds rate, an overnight bank lending rate, to 3.0 percent from 3.5 percent. It was the eighth cut of the year and the latest in a campaign to ease the cost of borrowing, keep consumers spending and prevent the world's largest economy from slipping into a recession.
Most economists expect the Fed to cut rates again Tuesday, bringing the fed funds rate below 3.0 percent for the first time since 1963. Many are also saying that a recession is almost inevitable now following last month's attacks, if one has not already begun.
"Given the strong fervor for doing something quickly to help the economy, given that [Fed Chairman Alan] Greenspan has said repeatedly that monetary policy is more effective at helping the economy in the short run than fiscal policy, Greenspan will push aggressively for a half-percentage-point cut," said Anthony Chan, chief economist at Banc One Investment Advisors.
Futures contracts on the fed funds rate -- which point to where investors believe the short-term rate will be in coming months – show that investors are betting it's almost a sure thing the Fed will cut by a half percentage point to 2.5 percent Tuesday.
The contracts also indicate it's very likely the Fed will slash another quarter-point from the rate by year-end, sinking it to 2.25 percent -- a level last seen 40 years ago.
A Reuters poll Friday found 21 of 25 Wall Street firms expect the Fed to cut rates by half a percentage point Tuesday. Reuters also found that 12 of 25 firms expect the funds rate to fall to 2.0 percent by year-end, 10 expect it to fall to 2.25 percent and 3 expect it to fall to only 2.5 percent.
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Economists will pay attention to the statement accompanying the rate cut; its language is an indication of what the Fed is leaning toward for its next move.
"A limited statement would be more productive because the Fed is trying to deal with psychological issues," said Bank One chief economist Diane Swonk. "They want the focus to be on their action, not their words."
Most economists agree that, however short their statement, the Fed will clearly show they're ready and willing to make more cuts if necessary.
"The Fed probably will continue easing until it has clear evidence of a self-sustaining recovery," said Salomon Smith Barney chief economist Kermit Schoenholtz.
Greenspan has warned against making panicky moves to help the economy, at least when it comes to fiscal stimulus, warning Congress that "it's far more important to be right than quick."
Still, last week's economic data painted a picture of a U.S. economy that was weaker even before the terror attacks than some economists thought.
"We knew the data collected after the attack was going to be weak, but I was a little dumbfounded by the fact that the numbers even before the attack were awfully weak," said Sung Won Sohn, chief economist at Wells Fargo & Co. "Even before the attack, the economy seems to have relapsed into the doldrums."
On Thursday -- the same day the Labor Department reported new claims for unemployment benefits jumped to the highest level in 9 years in the days after the attacks -- the Commerce Department said orders for long-lasting goods like cars and computers fell for the third straight month in August, while even the ever-resilient housing market showed signs of weakness.
More ominously -- since consumers fuel two-thirds of the U.S. economy -- the Conference Board reported Tuesday that its closely watched index of consumer confidence plunged in the weeks before the attacks. Some of the research firm's report included data collected after the attacks, but the bulk of it simply reflected the strain of hundreds of thousands of job cuts during a year-long slowdown in the U.S. economy.
And the University of Michigan Monday revised its closely watched consumer sentiment index to 81.8 for September from a previous reading of 83.6, saying it thought the attacks would have a "significant impact on sentiment," according to a Reuters report.
"The latest economic releases are just another sign that the economy is quite sick," said Oscar Gonzalez, economist with John Hancock Financial Services. "I am quite confident the Fed will react aggressively."
Click here for CNNfn.com's economic calendar
The slowdown has come as companies have slashed spending on technology and other investments, which has led to a recession in the manufacturing sector.
The terrorist attacks came just as there were hints that manufacturing was finally beginning to pull out of its slump, and if they hurt demand from consumers, could spark a recession.
"Consumer spending, which [has] kept the economy afloat, should decline in the third quarter and lead us into a formal, albeit shallow, recession," said Merrill Lynch chief economist Bruce Steinberg.
In fact, most economists think the U.S. will topple into a recession, however brief or shallow, as a result of the attacks -- if it's not in one already.
The government Friday raised its estimate of U.S. economic growth for the second quarter but the 0.3 percent increase in gross domestic product, the broadest measure of the nation's economy, was still the weakest in eight years.
President Bush, Congress, Greenspan, Treasury Secretary Paul O'Neill and other financial leaders are trying to come up with a plan to keep a downturn from lasting too long and hurting too much.
Already, Congress has earmarked, with Bush's approval, $40 billion in emergency relief and a $15-billion bailout for the reeling airline industry. Greenspan and former Treasury Secretary Richard Rubin, in a closed-door session with the Senate Finance Committee last week, discussed the possibility of a $100 billion stimulus package.
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Sen. Tom Daschle, D-S.D. | |
While insisting "fiscal discipline" be a guiding principal in any such package, Senate Majority Leader Tom Daschle, D-S.D., told CNNfn's Street Sweep program Thursday that Congressional Democrats might even consider a cut in the capital-gains tax. (492K WAV) or (492K AIF)
But a massive spending bill, combined with the Fed's earlier rate cuts and this year's tax cut could make the central bank reluctant to cut rates aggressively again after Oct. 2. On the other hand, a pre-emptive rate cut by the Fed could make Congress less inclined to pass costly spending measures or tax cuts.
"The Fed doesn't want to be dealing with the old economy, with deficits returning," said Swonk of Bank One. "They're trying to have some impact on decisions made now without getting us into permanent problems."
More important than any monetary or fiscal stimulus, however, will likely be restoring Americans' sense of security.
"The most important thing for us right now is to ensure that the country's security is back," Senator Daschle said. "Once that feeling of confidence is back, we think the economy will come back a lot in and of itself." 
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Special report: Eyes on the Fed
2Q GDP revised higher - Sep. 28, 2001
Weekly jobless claims jump after terror attacks - Sep. 27, 2001
Treasury Secretary O'Neill says attacks could delay recovery by a quarter - Sep. 26, 2001
U.S. consumer confidence falls - Sep. 25, 2001
Greenspan, Rubin, Senate leaders discuss boosts for economy - Sep. 25, 2001
Fed Chairman Greenspan sees long-term strength in U.S. economy - Sep. 20, 2001
Recession could follow terror attacks, but it might not last long - Sep. 20, 2001
Fed cuts rates a half percentage point - Sep. 17, 2001
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