Attack could precipitate recession

Published 9:00 pm Tuesday, September 11, 2001

Associated Press

WASHINGTON — The terrorist attacks in the nation’s business and government capitals may well push the teetering economy into recession, analysts suggested Tuesday.

The Federal Reserve said it stood ready to pump extra money into the economy if needed to try to avert such a development.

The Fed’s promise to supply additional money to the banking system was similar to a pledge it issued on the morning after the October 1987 stock market crash. That action, only two months into Alan Greenspan’s tenure as chairman, was credited with keeping the economy out of recession.

However, private analysts said the Fed’s magic of lower interest rates and ample supplies of cash to the banking system may not be enough to overcome Tuesday’s series of attacks, which occurred at a time when the economy was already struggling and consumer confidence was faltering.

"The economy has been on a high-wire act, straddling between a recession and anemic growth. Now the terrorists have cut the wire underneath our feet," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "The United States and the rest of the world are likely to experience a full-blown recession now."

The concern is that consumers will cut back further on their spending.

Consumer spending accounts for two-thirds of the nation’s economic activity. Even before Tuesday’s attacks, signs of trouble were evident as Americans grew more worried about their jobs with each new rash of layoff announcements.

Economists said the terror attacks, in addition to hurting consumer confidence, could disrupt the economy in a variety of ways, including severely curtailing air travel, which especially would harm areas that depend on tourism.

"There is no economic good that comes out of this. It is just a question of how bad will it be," said Mark Zandi, chief economist at Economy.com. "It is now likely we will get a negative GDP number for the third quarter, given all of the economic disruptions that this is creating with a shutdown of the transportation system and the financial markets."

The Fed’s promise to supply extra money to the banking system is an attempt to assure depositors that no bank will get caught without adequate resources to meet its normal operating needs.

Zandi predicted the Fed would follow that with further cuts in interest rates.

The Fed already had reduced its key benchmark rate, the federal funds rate, seven times so far this year, the last cut occurring at its Aug. 21 meeting.

The Fed next meets on Oct. 2 although some analysts said the central bank may feel a need to deliver a positive jolt to markets with an intermediary rate cut, something it has already done twice this year.

Greenspan, who had been attending a banking conference in Basel, Switzerland, was on a plane returning to the United States when the terrorist attacks on the World Trade Center occurred. His commercial flight, along with other international flights to the United States, was diverted. A Basel police official said Greenspan’s flight had returned to Switzerland.

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