Fed slices key bank rate to lowest level in 39 years

Associated Press

WASHINGTON — The Federal Reserve cut a key interest rate by half a percentage point Tuesday, pushing it to the lowest level since John F. Kennedy was president, in a struggle to offset economic shocks from the terrorist attacks.

The central bank said the Sept. 11 attacks "significantly heightened uncertainty in an economy that was already weak."

For the first time, a top member of President Bush’s economic team publicly used the word "recession" to describe the country’s present circumstances.

The latest cut, the ninth this year, pushed the target for the federal funds rate to 2.5 percent, its lowest level since May 1962.

The move was quickly matched by a half-point cut in commercial banks’ prime lending rate, the benchmark for millions of consumer and business loans. That rate fell to 5.5 percent, a level last seen in October 1972.

The Federal Reserve also cut its discount rate, the interest it charges to make direct loans to banks, to 2 percent, the lowest level since November 1958.

The action means it will be easier for individuals and businesses to borrow money for relatively short periods. Long-term rates for such loans as mortgages typically aren’t directly affected by discount rate cuts.

The Fed has used its discount window to pump out billions of dollars in direct loans to banks in the wake of the attacks to keep the financial system operating.

Wall Street, which suffered the biggest one-day point loss in its history following the Fed’s last rate cut on Sept. 17, had a better reaction this time around. The Dow Jones industrial average finished with a rally to jump 113.76 points to 8,950.59.

Even with the funds rate at its lowest level in nearly four decades, analysts predicted more rate cuts to come, with many looking for half-point reductions at the Fed’s final two meetings of the year on Nov. 6 and Dec. 11.

While such an aggressive easing effort on the part of the Fed would normally raise fears of higher inflation down the road, analysts said there was little danger of that given how weak the economy is.

"It is entirely appropriate for the Fed to be pulling out all the stops now," said Bill Cheney, chief economist at John Hancock Financial Services in Boston. "The economy was stumbling before the attacks, and it now seems all but certain that we will fall into a recession."

R. Glenn Hubbard, chairman of the president’s Council of Economic Advisers, told Congress that the loss of life, the blow to the financial sector and the disruption of airline service "increase significantly the likelihood that the economy is in a recession."

Bush, working with leaders of Congress to put together an economic stimulus package of tax relief for businesses and individuals and increased government spending, said he would "let the number crunchers" make the decision on whether a recession had begun.

"We don’t need numbers to tell us people are hurting," he said.

The administration and Congress appear to be taking the advice of Federal Reserve Chairman Alan Greenspan, who has said that any stimulus package should be in the range of $100 billion, including the $55 billion Congress has already approved for reconstruction and to aid the airlines.

Greenspan has cautioned that the increased spending and tax relief should not be so large that it forces financial markets to push long-term interest rates higher, thus offsetting the beneficial impact from the Fed’s effort to lower short-term borrowing rates.

The Fed’s latest rate cut was met with approval from business leaders.

"The Fed made an important and supportive move today that should mitigate the negative impact of last month’s tragedy on the economy overall and help set the stage for a recovery in 2002," said Jerry Jasinowski, president of the National Association of Manufacturers.