U.S.

Fed Cuts Rates Again

By CBSNews.com staff CBSNews.com staff

November 6, 2001 / 3:16 AM EST / CBS

The Federal Reserve cut interest rates by an aggressive half-percentage point 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.

After a closed-door meeting, Federal Reserve Chairman Alan Greenspan and his colleagues lowered the 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.

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.

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Heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity," the Fed said in a statement.

In the part of the statement that reflects possible future action, policy-makers held the door open to further rate cuts.

"The risks are weighted mainly toward conditions that may generate economic weakness," the Fed said.

"The Fed is trying to arrest a slide in the economy and consumer confidence," said Sung Won Sohn, chief economist at Wells Fargo.

Wall Street rallied Tuesday after the Fed cut rates and said it may do it again.

The Dow Jones industrial average climbed 150.09 points to 9,591.12, the highest close since the blue-chip index finished at 9,605.5 on Sept. 10, less than 24 hours before the Sept. 11 air attacks on the World Trade Center and Pentagon.

The Nasdaq composite also ended on a positive note jumping 41.44 points to 1,835.09.

"It's good to see the Fed remains aggresive. The little bit of surprise is that there are indications that rates are going to go even lower than 2 percent," said Barry Hyman, chief investment strategist, Ehrenkrantz King Nussbaum in New York.

"I think that's still good news. I think that lower interest rates is clearly one part of the puzzle for economic recovery. It gives consumers and businesses plenty of flexibility."

CBS News Business Correspondent Anthony Mason reports that on mortgages under $275,000, the 30-year fixed rate has now fallen below six-and-a-half percent and a 15-year fixed below 6 percent.

By one estimate, lower monthly payments could put as much as $70 billion back into Americans' pockets next year — money which Greenspan hopes they will then spend in the economy.

Against a backdrop of plunging consumer confidence and soaring unemployment, economists worry that the economic picture might get a lot worse before it gets better.

A big fear is that consumers, whose spending accounts for two-thirds of all economic activity, will continue to cut back as the job market deteriorates, further undercutting a weak economy.

The Fed at its last meeting on Oct. 2 cut the federal funds rate, the interest that banks charge on overnight loans, to 2.5 percent, the lowest level since May 1962.

Still, many economists believe the Fed's aggressive credit easing probably won't avert a recession this year. But they are hopeful the action will prevent any downturn from being drawn out.

Rate Cuts At A Glance

Here are the 10 interest rate cuts made by the Fed so far this year:
Jan. 3: First one-half-percentage-point cut since July 1992 and first rate change outside the regular Fed meeting schedule since October 1998. Federal funds rate: 6 percent.
Jan. 31: Second one-half point reduction, the first time since Greenspan took office in 1987 that the federal funds rate was reduced by a full point in a month. Funds rate: 5.5 percent.
March 20: Third half-point cut. Funds rate: 5 percent.
April 18: Fourth half-point reduction and second rate move this year outside the regular Fed meeting schedule. Funds rate: 4.5 percent.
May 15: Fifth half-point cut. Funds rate: 4 percent.
June 27: First quarter-point reduction in this cycle, leaving funds rate 2.75 percentage points below the 6.5 percent level it held at the beginning of thyear. Funds rate: 3.75 percent.
Aug. 21: Second quarter-point reduction, pushing the funds rate to the lowest point since early April 1994. Funds rate: 3.5 percent.
Sept. 17: Sixth half-point cut as the Fed becomes more aggressive following the Sept. 11 terrorist attacks, pushing the funds rate to its lowest level since early 1993. Funds rate: 3 percent.
Oct. 2: Seventh half-point cut, to the lowest level since May 1962. Funds rate: 2.5 percent.
Nov. 6: Eighth half-point cut follows bad news on consumer confidence and jobless rate. Funds rate falls to 2 percent, the lowest since September 1961. (AP)

The economy - which had been growing weakly for more than a year - shrank at a 0.4 percent annual rate, as measured by the gross domestic product, in the July-September quarter, the government reported last week. Analysts predict the current quarter will show an even larger contraction. A common definition of recession is two consecutive quarters of declining GDP.

Fallout from the terrorist attacks was evident in a spate of other dismal economic reports released last week:

Consumer confidence plunged to a 7-and-a-half-year low in October.

The nation's unemployment soared from 4.9 percent to 5.4 percent in October and 415,000 jobs were eliminated during the month, the biggest one-month decline in 21 years.

Manufacturing activity in October plunged to its lowest level since February 1991, when the country was mired in its last recession.

Consumers cut back on spending in September by the largest amount in nearly 15 years.

Adding to the economic uncertainty is the threat of new terrorist attacks and increasing worries about anthrax contamination in the mail.

"What consumers and businesses are going to have to do is steel themselves for a challenging few months but stay focused on the idea that we will emerge from this disappointing period at some juncture," said Carl Tannenbaum, chief economist at LaSalle Bank/ABN AMRO.

Tannenbaum and other economists are hopeful the economy will rebound in the second half of next year.

They are counting on the Fed's sizable rate cuts, President Bush's earlier tax-cut package and as much as $100 billion in new economic stimulus being contemplated by Congress to jolt the economy back to a healthy pace of growth.

Tim O'Neill, chief economist at the Bank of Montreal and Harris Bank, predicted the economy will be growing at an annual rate of more than 4 percent in the second half of 2002.

"That's the kind of bounce back we're expecting. There's lots of stimulus in the pipeline," O'Neill said. The recession, he said, will be "short and mildly sour."