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News > Economy
Fed likely to cut again
October 2, 2001: 11:45 a.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 questions 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.

  graphic RATE FACTS  
    A half percentage point rate cut would:
  • Bring short-term rates to lowest in nearly 40 years
  • Bring rates below current rate of inflation
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    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.

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    graphicCNNfn's Tim O'Brien reports from Washington with a preview of the Fed decision.
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    "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.

    Click here for more on the Fed and rates

    The contracts also indicate it's very likely the Fed will slash another quarter-point by year-end, to 2.25 percent -- a level last seen 40 years ago. Either a half-point or a quarter-point cut will also take short-term interest rates below the standard rate of inflation, the consumer price index, which was at 2.7 percent at the end of August.

    A Reuters poll Friday found 21 of 25 Wall Street firms expected the Fed to cut rates by half a point Tuesday. Reuters also found that 12 of 25 firms expected the funds rate to fall to 2.0 percent by year-end, 10 expected it to fall to 2.25 percent and 3 expected it to fall to 2.5 percent.

    Economists will also pay attention to the Fed's statement after the meeting; its language is an indication of its next move, if any, on rates. Most economists agree, however, that the Fed will clearly show it's 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, telling Congress that "it's far more important to be right than quick."

    Still, recent reports paint a picture of an economy that was weaker even before the terror attacks than some analysts thought.

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    "Even before the attack, the economy seems to have relapsed into the doldrums," said Sung Won Sohn, chief economist at Wells Fargo & Co.

    On Thursday -- the same day the Labor Department reported new claims for unemployment benefits jumped to the highest level in nine 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 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.

    That report followed an earlier one from the Conference Board that showed consumer confidence plunged even in the weeks before the attacks, reflecting the strain of hundreds of thousands of job cuts during the year-long economic slowdown.

    "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 came as businesses slashed spending on technology and other investments, leading to a 14-month downturn in the manufacturing sector. Unfortunately, the attacks came just as there were hints that industry was finally beginning to pull out of its slump.

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    Now, most economists think the economy as a whole will topple into a recession, however brief or shallow, as a result of the attacks -- if it's not in one already.

    "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.

    The government last 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, members of 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 $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 last week that Congressional Democrats might even consider a cut in the capital-gains tax.

    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." graphic

      RELATED STORIES

    Special report: Eyes on the Fed

    U.S. manufacturing shrinks after attacks; consumer spending up, incomes flat in August - Oct. 1, 2001

    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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