Rate cut fails to bolster market

Associated Press

WASHINGTON — The Federal Reserve led a global effort to cut interest rates Monday as the United States and its allies tried to reassure jittery consumers and businesses that the economy will not be blown into recession by last week’s terrorist attacks.

However, the coordinated half-point cuts announced by the Fed, the European Central Bank, the Bank of Canada and Switzerland’s central bank failed to calm investors’ concerns.

Wall Street, which reopened Monday after its longest shutdown since the Great Depression, suffered its biggest one-day point loss on record, falling 684.81 points to close below the 9,000 level for the first time in two and a half years. The 7.1 percent decline ranked 14th in percentage terms.

While some private economists believe the terrorist attack makes a recession this year all but inevitable, the administration did what it could to restore confidence.

"I’ve got great faith in the economy. … The underpinnings for growth are there," President Bush said.

Treasury Secretary Paul O’Neill, the administration’s chief economic spokesman, made the rounds of television news programs on Monday, insisting the economy will quickly recover, bolstered by the Fed’s previous seven rate cuts and the $40 billion in tax rebate checks already in the pipeline.

He said even with the huge market sell-off on Monday "we should end the day with a thumbs up" because stock traders were able to handle the huge volume despite the loss of vital telecommunications equipment from the destruction in New York’s financial district.

O’Neill rejected suggestions that the adverse market reaction was an indication the Fed was powerless to reverse the current downdraft with interest rate cuts, which have left the federal funds rate, the interest that banks charge each other at 3 percent.

O’Neill said that the 3 percent funds rate was "still a long way between here and nothing." Private economists forecast the funds rate could be cut to 2 percent or even lower in coming weeks.

Many private economists supported the administration’s view that growth should rebound quickly.

"This economy is going to be stimulated more for 2002 than anyone thought imaginable," said Diane Swonk, chief economist at Bank One in Chicago.

The reduction in the Fed’s funds rate to 3 percent was quickly matched by commercial banks, who lowered their prime lending rate a similar half-point to 6 percent. That put the prime rate, the benchmark for millions of consumer and business loans, at its lowest point in nine years.

The Fed made the decision to cut rates in a 7:30 a.m. conference call, announcing the move more than an hour before Wall Street opened for the day. The European Central Bank, which controls monetary policy for the 12 nations who have adopted the euro as a common currency, Canada and Switzerland cut rates by a similar half point later in the day.

Economists said this coordinated action was needed given the fact that markets not only in the United States but around the world have been turbulent since the terrorist attack.

"If central banks are cooperating and coordinating their actions, this will smooth out some of the panic selling," said Mark Zandi, chief economist at Economy.com.