Key interest rate at lowest level in 40 years

WASHINGTON -- The Federal Reserve dropped a key interest rate to its lowest level in 40 years as it battled to prevent the "heightened uncertainty" following the terrorist attacks from sending the country into a deep recession.

The Fed on Tuesday slashed its federal funds rate, the key benchmark for overnight loans, by a half-point to 2 percent and signaled that it was prepared to continue cutting if conditions deteriorate further.

"The Fed is telling us they are really worried and they will likely move again at their December meeting," said David Seiders, chief economist at the National Association of Home Builders.

Wall Street rallied on the news, given that investors had been split over whether the Fed would move by a half-point or a quarter-point. The Dow Jones industrial average ended the day up 150.09 points at 9,591.12, its best close since the Sept. 11 attacks and within 14 points of its Sept. 10 level. Other indexes posted gains as well, with the technology-heavy Nasdaq up 41.43 to 1,835.08.

The latest rate cut, the 10th this year, was taken against a backdrop of increasingly gloomy statistics indicating that the nation's longest economic expansion -- more than a decade of uninterrupted growth -- has ended.

The government reported last week that the gross domestic product declined at an annual rate of 0.4 percent in the July-September quarter. Many analysts believe the pace of the downturn will accelerate to a drop of 2 percent or more in the current quarter. A recession is traditionally defined as two consecutive quarters of falling GDP.

Job cuts in October alone totaled 415,000, the biggest one-month total in 21 years.

The concern is that the hundreds of thousands of job layoffs that have occurred since the Sept. 11 attacks will trigger a sharp reduction in consumer spending as more people become fearful of losing their own jobs, deepening and prolonging the recession.

Banks lower rates

The Fed's action, which pushed the funds rate down to its lowest point since September 1961, was quickly matched by commercial banks that reduced their prime lending rate by a half-point. The benchmark for millions of consumer and business loans was cut to 5 percent, its lowest level since June 1972.

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

The Fed repeated the phrase it employs when it wants to hold out the possibility of further rate cuts, saying that in the near future "the risks are weighted mainly toward conditions that may generate economic weakness."

December cut possible

Many economists said the Fed could very well cut rates by another half-point at its last meeting of the year on Dec. 11. That would push the funds rate down to 1.5 percent, a level last seen in July 1961, when John F. Kennedy was president.

Some analysts are worried that plunging consumer confidence and the fears generated by the terrorist attacks and anthrax shipments in the mail will overwhelm the Fed's rate cuts.

"The Fed is trying to arrest the slide in the economy and in consumer confidence, but it may be running out of ammunition," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Jerry Jasinowski, president of the National Association of Manufacturers, said that on top of all the other problems, his member companies are beginning to report increased trouble getting bank loans. He said that, in the four weeks following the Sept. attacks, loans to businesses declined at an annual rate of 20 percent.

"Under normal circumstances, the decision of banks to tighten credit in response to unprecedented losses would be understandable. But we are at war and a strong economy is essential to victory," Jasinowski said, calling on government regulators to convince banks to restore "sensible lending standards."

Hope for next year

Many economists argued that the Fed's aggressive moves, along with the massive tax cut President Bush pushed through Congress last spring and an additional $100 billion in economic stimulus now being debated in Congress, should be enough to assure an end to the recession next year.

However, while many analysts had expected the rebound to occur in the first three months of next year, the recent string of bad statistics has caused some analysts to predict the recession will last into spring, with the unemployment rate, which shot up to 5.4 percent in October, topping 6 percent before the recovery begins.

Analysts believe the recession will not be worse than the 1990-91 downturn, which lasted nine months, although they cautioned that it could feel worse to many people given that unemployment had dropped to a 30-year low of 3.9 percent last year.

"While the data are unmistakably dismal, this is so far simply a normal recession," said Bill Cheney, chief economist at John Hancock in Boston. "There is every reason to think that vigorous monetary and fiscal stimulus will produce a vigorous recovery."