Interest rate cut sends Dow up 113.76 points

WASHINGTON -- The Federal Reserve cut a key interest rate by one-half 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 had "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 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 had suffered the biggest one-day point loss in 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.

Broader indexes also were higher. The Standard & Poor's 500 index rose 12.78 to 1,051.33, while the Nasdaq composite index was up 11.87 at 1,492.33.

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 warnings

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.

Many economists believe the economy, which had slowed to a barely perceptible growth rate of 0.3 percent in the April-June quarter, will probably decline at annual rates of 1 percent in the July-September and October-November quarters.

In addition to the Fed rate cuts and the increased stimulus spending from Congress, some analysts said the economy also needs quick success in the military battle against terrorism to restore confidence and get Americans spending again.

"How quickly the economy can come back will depend on what kind of progress we make in this war on terrorism," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "Significant progress will do wonders for consumer confidence, the stock market and the economy."