Associated Press
WASHINGTON — The Federal Reserve dropped a key interest rate to its lowest level in 40 years as it battled to prevent the uncertainty following the terrorist attacks from sending the country into a deep recession.
The Fed on Tuesday slashed its federal funds rate, the key benchmark for overnight loans, by a half-point to 2 percent and signaled that it was prepared to continue cutting if conditions deteriorate further.
"The Fed is telling us they are really worried and they will likely move again at their December meeting," said David Seiders, chief economist at the National Association of Home Builders.
Wall Street rallied on the news, given that investors had been split over whether the Fed would move by a half-point or a quarter-point. The Dow Jones industrial average ended the day up 150 points at 9,591 after being down by 50 points just before the midafternoon Fed announcement.
The latest rate cut, the 10th this year, was taken against a backdrop of increasingly gloomy statistics indicating that the nation’s longest economic expansion — more than a decade of uninterrupted growth — has ended.
The government reported last week that the gross domestic product declined at an annual rate of 0.4 percent in the July-September quarter. Many analysts believe the pace of the downturn will accelerate to a drop of 2 percent or more in the current quarter. A recession is traditionally defined as two consecutive quarters of falling GDP.
Job cuts in October alone totaled 415,000, the biggest one-month total in 21 years.
The concern is that the hundreds of thousands of job layoffs that have occurred since the Sept. 11 attacks will trigger a sharp reduction in consumer spending as more people become fearful of losing their jobs, deepening and prolonging the recession.
The Fed’s action, which pushed the funds rate down to its lowest point since September 1961, was quickly matched by commercial banks that reduced their prime lending rate by a half-point. The benchmark for millions of consumer and business loans was cut to 5 percent, its lowest level since June 1972.
"Heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity," the Fed said in a four-paragraph statement.
The Fed repeated the phrase it employs when it wants to hold out the possibility of further rate cuts, saying that in the near future "the risks are weighted mainly toward conditions that may generate economic weakness."
Many economists said the Fed could very well cut rates by another half-point at its last meeting of the year, on Dec. 11. That would push the funds rate down to 1.5 percent, a level last seen in July 1961, when John F. Kennedy was president.
Some analysts are worried that plunging consumer confidence and the fears generated by the terrorist attacks and anthrax shipments in the mail will overwhelm the Fed’s rate cuts.
"The Fed is trying to arrest the slide in the economy and in consumer confidence, but it may be running out of ammunition," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.
Copyright ©2001 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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