Fed Cuts Rates Half Point, Ready for More
By Glenn Somerville
WASHINGTON (Reuters) - The Federal Reserve cut U.S. interest rates by an aggressive
half-percentage point on Tuesday for the third time since the Sept. 11 attacks and signaled its
readiness to do more to help an economy widely believed to be in recession.
The Fed lowered its key federal funds rate for overnight bank loans for the
tenth time this year to 2 percent -- the lowest level since the Kennedy
administration in 1961. The central bank also dropped its more symbolic
discount rate by a half-point to 1.5 percent.
``Heightened uncertainty and concerns about a deterioration in business
conditions both here and abroad are damping economic activity,'' the Fed
said in a statement explaining its latest cut.
The Dow Jones industrial average pared its losses after the announcement
and leading U.S. banks quickly moved to cut the borrowing rate charged
to their best customers.
The latest cut comes against an increasingly grim backdrop of rising
unemployment and eroding confidence. The third quarter logged the sharpest quarterly contraction in national economic activity
since the last recession in 1990-91.
In its statement, the central bank said it still saw weakness, rather than price pressures, as the main threat to the U.S. economy,
a sign it was ready to cut rates further should gross domestic product continue to shrink as most private forecasters expect it
will into early next year.
The economy already was slowing before hijacked aircraft flattened the World Trade Center in New York and damaged the
Pentagon, halting much of national commerce for days and inflicting lasting scars on airline and other industries.
Last week, the Commerce Department confirmed that gross domestic product shrank at 0.4 percent rate in the third quarter --
the first contraction since the last recession in 1999-91.
During October, 415,000 jobs were scrubbed from payrolls, the most in two decades, as the combined impact of the attacks
and an anthrax scare braked activity throughout the economy,
Most economists foresee GDP shrinking again this quarter and many think this will continue in the first quarter 2002, easily
meeting the commonly accepted definition of a recession in which national output falls for six months or more.
The Fed's rate-cutting campaign, one of the most sustained and aggressive in U.S. central bank history, has failed to light a
flame under the sputtering economy but analysts say it is likely to help ignite a strong recovery next year.
In addition to the heavy dose of monetary ease, the government added direct fiscal stimulus of about $55 billion in emergency
spending and industry aid since the attacks and is weighing another tax-cut and spending program worth as much as $100
billion that will kick in fully next year.
Analysts note that with inflation reined in, the Fed has freedom to keep trying to revive U.S. activity and economists believe it is
likely to cut rates further. Interest rates are now already below the rate of the rise in consumer prices, although they are still
above other inflation measures that policymakers monitor.
But a strong rebound in growth in the second half next year, which many economists are forecasting, could quickly force the
central bank to reverse course and start to raise rates again in order to avoid a breakout in prices once some of the current
slack in the economy is taken up. Gruß Dr. Broemme