Fed cuts interest by half-point in effort to boost economy

By Martin Crutsinger

Associated Press

WASHINGTON – The Federal Reserve cut a key interest rate by one-half point Monday, trying to keep the U.S. economy from falling into a recession following the worst terrorist attack in America’s history.

The reduction pushed the federal funds rate, the interest that banks charge each other, to 3 percent, the lowest level in nine years.

It was the eighth rate cut this year and economists predicted there would be more to come as the Fed tries to keep last week’s terrorist attack from pushing an already weak economy over the edge into recession.

The Fed action came after an emergency conference call among Fed policy-makers at 7:30 a.m. EDT, two hours before Wall Street would open for the first time since Tuesday’s terrorist attack.

The rate cut did not avert a steep sell-off as the Dow Jones industrial average plummeted 620 points in the first hour of trading before bargain hunters came in to push stocks slightly higher. The Dow was off 458 points in late morning trading.

Analysts predicted the Fed could keep cutting rates until the markets regain confidence.

“This rate cut is just a down payment with additional cuts on the way,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

The central bank of Canada also announced Monday that it was cutting a key interest rate by one-half percentage point as well and some analysts predicted more coordinated rate reductions from major economic powers in the days to come.

“Part of the problem is that global investors, who are huge players in our bond and stock markets, are nervous,” said Mark Zandi, chief economist at Economy.com. “If central banks across the globe are cooperating and coordinating their actions, that will help smooth out some of the panic selling.”

In a related action, the Fed Board of Governors approved a half-point reduction in the discount rate, which the Fed charges on loans to banks, to 2.5 percent. The Fed last week invited banks to make full use of the discount window if they were facing unusual withdrawal problems because of disruptions following the bombing of the World Trade Center in the heart of New York’s financial district.

A Fed spokeswoman said the Federal Open Market Committee, the policy-making group that sets interest rates, began its 25-minute conference call with a moment of silence for victims of the attack.

The Fed rate cut was the biggest effort so far by U.S. authorities to instill confidence in a badly shaken financial system.

In a statement explaining its action, the Fed said it would “continue to supply unusually large volumes of liquidity to the financial markets as needed until more normal market functioning is restored.”

The action by the Fed was followed immediately by announcements from major banks that they will lower their prime rate, the benchmark for millions of business and consumer loans, by a similar half-point, to 6 percent.

Analysts applauded the half-point rate cut, saying it was the right move to try to bolster the economy and financial markets.

“This is an encouraging sign that the Fed is there to protect the economy and the banking system,” said Richard Yamarone of Argus Research Corp.

On Sunday, President Bush urged people to get back to work and acknowledged some concern about how the terrorist attack has affected the struggling economy.

“I have great faith in the resiliency of the economy. No question about it, this incident affected our economy, but the markets open tomorrow, people go back to work. And we’ll show the world,” he said.

The Fed signaled that if further rate cuts are needed it will provide them, saying the balance of future risks remains tilted toward economic weakness.

“Even before the tragic events of last week, employment, production and business spending remained weak, and last week’s events have the potential to damp spending further,” the Fed said in its statement.

Economists have been worried that last week’s four airliner hijackings and attacks on the World Trade Center and Pentagon could jolt Americans’ confidence so much that consumers, whose spending has been keeping the economy afloat, could close their pocketbooks. That could throw the economy into recession.

To avert a full-blown downturn, the Federal Reserve has slashed interest rates seven times this year beginning with five half-point cuts in the funds rate followed by two quarter-point moves on June 27 and Aug. 21.