Fed cuts key interest rate in effort to cushion fallout from terror attacks

  • Jeannine Aversa / Associated Press
  • Monday, November 5, 2001 9:00pm
  • Business

By Jeannine Aversa

Associated Press

WASHINGTON – The Federal Reserve cut a key interest rate Tuesday by a half-point, its latest effort to rescue an 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 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.

_The nation’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 Bush’s earlier tax-cut package and as much as $100 billion in new economic stimulus being contemplated by Congress to jolt the economy back to a healthy pace of growth.

On the Net:

Federal Reserve: http://www.federalreserve.gov

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 This material may not be published, broadcast, rewritten, or redistributed.

Talk to us

> Give us your news tips.

> Send us a letter to the editor.

> More Herald contact information.

More in Business

A closing sign hangs above the entrance of the Big Lots at Evergreen and Madison on Monday, July 22, 2024, in Everett, Washington. (Ryan Berry / The Herald)
Big Lots announces it will shutter Everett and Lynnwood stores

The Marysville store will remain open for now. The retailer reported declining sales in the first quarter of the year.

George Montemor poses for a photo in front of his office in Lynnwood, Washington on Tuesday, July 30, 2024.  (Annie Barker / The Herald)
Despite high mortgage rates, Snohomish County home market still competitive

Snohomish County homes priced from $550K to $850K are pulling in multiple offers and selling quickly.

Henry M. Jackson High School’s robotic team, Jack in the Bot, shake hands at the 2024 Indiana Robotics Invitational.(Henry M. Jackson High School)
Mill Creek robotics team — Jack in the Bot — wins big

Henry M. Jackson High School students took first place at the Indiana Robotic Invitational for the second year in a row.

The computer science and robotics and artificial intelligence department faculty includes (left to right) faculty department head Allison Obourn; Dean Carey Schroyer; Ishaani Priyadarshini; ROBAI department head Sirine Maalej and Charlene Lugli. PHOTO: Arutyun Sargsyan / Edmonds College.
Edmonds College to offer 2 new four-year degree programs

The college is accepting applications for bachelor programs in computer science as well as robotics and artificial intelligence.

FILE — Boeing 737 MAX8 airplanes on the assembly line at the Boeing plant in Renton, Wash., on March 27, 2019. Boeing said on Wednesday, Feb. 21, 2024, that it was shaking up the leadership in its commercial airplanes unit after a harrowing incident last month during which a piece fell off a 737 Max 9 jet in flight. (Ruth Fremson/The New York Times)
Federal judge rejects Boeing’s guilty plea related to 737 Max crashes

The plea agreement included a fine of up to $487 million and three years of probation.

Neetha Hsu practices a command with Marley, left, and Andie Holsten practices with Oshie, right, during a puppy training class at The Everett Zoom Room in Everett, Washington on Wednesday, July 3, 2024. (Annie Barker / The Herald)
Tricks of the trade: New Everett dog training gym is a people-pleaser

Everett Zoom Room offers training for puppies, dogs and their owners: “We don’t train dogs, we train the people who love them.”

Andy Bronson/ The Herald 

Everett mayor Ray Stephenson looks over the city on Tuesday, Jan. 5, 2015 in Everett, Wa. Stephanson sees  Utah’s “housing first” model – dealing with homelessness first before tackling related issues – is one Everett and Snohomish County should adopt.

Local:issuesStephanson

Shot on: 1/5/16
Economic Alliance taps former Everett mayor as CEO

Ray Stephanson will serve as the interim leader of the Snohomish County group.

Molbak's Garden + Home in Woodinville, Washington will close on Jan. 28. (Photo courtesy of Molbak's)
After tumultuous year, Molbak’s is being demolished in Woodinville

The beloved garden store closed in January. And a fundraising initiative to revitalize the space fell short.

Everett Mayor Cassie Franklin, Advanced Manufacturing Skills Center executive director Larry Cluphf, Boeing Director of manufacturing and safety Cameron Myers, Edmonds College President Amit Singh, U.S. Rep. Rick Larsen, and Snohomish County Executive Dave Somers participate in a ribbon-cutting ceremony on Tuesday, July 2 celebrating the opening of a new fuselage training lab at Paine Field. Credit: Arutyun Sargsyan / Edmonds College
‘Magic happens’: Paine Field aerospace center dedicates new hands-on lab

Last month, Edmonds College officials cut the ribbon on a new training lab — a section of a 12-ton Boeing 767 tanker.

Gov. Jay Inslee presents CEO Fredrik Hellstrom with the Swedish flag during a grand opening ceremony for Sweden-based Echandia on Tuesday, July 30, 2024, in Marysville, Washington. (Ryan Berry / The Herald)
Swedish battery maker opens first U.S. facility in Marysville

Echandia’s marine battery systems power everything from tug boats to passenger and car ferries.

Helion Energy CEO and co-founder David Kirtley talks to Governor Jay Inslee about Trenta, Helion’s 6th fusion prototype, during a tour of their facility on Tuesday, July 9, 2024 in Everett, Washington. (Olivia Vanni / The Herald)
State grants Everett-based Helion a fusion energy license

The permit allows Helion to use radioactive materials to operate the company’s fusion generator.

People walk past the new J.sweets storefront in Alderwood Mall on Thursday, July 25, 2024, in Lynnwood, Washington. (Olivia Vanni / The Herald)
New Japanese-style sweets shop to open in Lynnwood

J. Sweets, offering traditional Japanese and western style treats opens, could open by early August at the Alderwood mall.

Support local journalism

If you value local news, make a gift now to support the trusted journalism you get in The Daily Herald. Donations processed in this system are not tax deductible.