Another rate cut is likely

  • Wednesday, October 31, 2001 9:00pm
  • Business

Associated Press

WASHINGTON — No region of the country has escaped the economic fallout from the terrorist attacks, the Federal Reserve said Wednesday.

Analysts said the Fed’s new assessment of business conditions around the country increased the likelihood that the central bank will cut interest rates for a tenth time this year when its policymakers meet on Nov. 6.

Releasing its latest survey, compiled from reports from its 12 regional banks, the Fed said the Sept. 11 attacks depressed consumer spending, forced cancellation of orders to manufacturing companies and caused widespread layoffs across a variety of industries.

"Layoffs and plants closings have been reported in many industries, from financial services on the East Coast to media and advertising on the West Coast to auto parts in the central states," the report stated.

Most economists said the new report made a tenth rate cut all but inevitable. Many predicted the reduction will be the larger half-point that the central bank has used for most of this year.

The Fed has cut rates by 4 percentage points since Jan. 3, pushing its key federal funds rate to 2.5 percent, the lowest level in nearly 40 years.

"I think the Fed will cut by a half-point because of the mushrooming and spreading weakness in the economy and also because anything less would disappoint the markets," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

The Fed survey, known as the beige book for the color of its cover, depicted an economy that came to a virtual standstill in the days immediately following Sept. 11 as air travel was temporarily suspended and Americans stayed home to watch television news reports.

Since the initial shock, consumers have returned to the stores, but spending was below the level of early September, causing many retailers to lower their expectations for upcoming holiday sales.

"Business activity recovered quickly from some aspects of the shock, but longer-run aspects are more difficult to assess," the report said.

In terms of the impact on employment, the Fed noted large layoffs in the aircraft and aircraft parts industries as orders for new planes have been cut sharply. It also noted sharp job losses in many other industries.

"The continued weakness in manufacturing has contributed to pessimism about when orders will improve," the survey said. "Many districts do not expect a turnaround until 2002."

Many economists believe that economic output contracted in the July-September quarter and will fall even more sharply in the current quarter. The traditional definition of a recession is two consecutive quarters of falling gross domestic product.

Economists are forecasting a rebound in early 2002, helped by massive amounts of government stimulus in the form of increased spending, new tax cuts and the lower interest rates provided by the Fed.

Copyright ©2001 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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