An urgent bid to lift economy
Fed's half-point cut in interest rates Monday is part of rare show of 'economic solidarity' in wake of terror attack.
NEW YORK — The surprise interest-rate cut by the Federal Reserve Board yesterday is aimed at bolstering an economy that is now in grave danger of slipping into a recession.
By making a half-point rate reduction before the market even opened - the first time it has done so in US history - the Fed was seeking to bolster consumer and investor confidence in the wake of last week's terrorist attacks.
The Fed move joins coordinated efforts by central banks in Europe, Japan, and Canada to inject large amounts of money into the global economy.
Beyond that, corporate chieftains, brokerage firms, and even many individual investors in the US pledged to buy stock yesterday in a show of economic solidarity.
"It's obviously unprecedented what's happened in New York...," says Caroline Atkinson, a former Treasury official under President Clinton, of the coordinated efforts to get the markets back up and boost confidence.
This latest Fed cut, which will lower short-term borrowing costs, will be
particularly important for businesses borrowing money to get them through the tough times.
It will also help consumers, hit by layoff news as well as shaken by last week's attacks, by reducing the interest rate on credit cards and home-equity loans.
In fact, economists believe the Fed's aggressive move, combined with some stimulative dollars from Congress, may do more than just pull the economy out of its slump next year. It could propel growth forward.
"We're going to see quite a significant rebound here," says Lyle Gramley, a former Federal Reserve governor and now a consulting economist with the Mortgage Bankers Association in Washington.
The Fed's move yesterday followed an active week, when it injected extra money into the system by purchasing $38.25 billion worth of government bonds from investment firms. Usually, the Fed sells or buys no more than a few billion dollars of bonds in a day.
And the Bank of Japan lent its struggling banks $17 billion one day last week.
"We are committed to ensuring that this tragedy will not be compounded by disruption to the global economy," stated the governments of the US, Canada, Britain, Japan, Germany, Italy, and France.
In yesterday's move, the Fed not only cut rates and injected money into the economy, but also assured financial institutions that it would lend money to cover short-term cash needs. This is similar to moves it made last week, when it loaned money to many banks that did not have access to the "commercial paper" market for short-term debt.
"The Fed has been incredible the last few days, with all the things they are doing," says John Rafal, branch manager of Raymond James Financial Services in Essex, Conn.
Despite the Fed's pre-market rate reduction, the equity markets had a bad opening on Monday morning. At midday, the Dow Jones Industrial Average was down more than 500 points, or about 5 percent. At one point, the index was below 9000.
Robert MacIntosh of Eaton Vance Management, a large Boston-based mutual fund, says it does not appear that the rate cut did much to help the market.
"To be off as much as it has - it's going to be hard to bounce back from that," he says. He's telling clients, however, to sit tight. "To sell into this is probably a mistake."
The White House, too, cautioned Americans not to become spooked by the markets. "The fundamentals of the economy remain very strongly and solidly in place," said Ari Fleischer, a spokesman for the White House.
Even so, economists have been quickly lowering their growth estimates. For example, Mark Zandi of economy.com, a financial website, had expected the current quarter to post an annualized growth rate of 0.8 percent. With all the disruptions, he now expects GDP to shrink 0.2 percent. But he does see a 1 percent gain in the fourth quarter. "The government aid, insurance payouts, also private resources will offset the drag on the economy."
In fact, retailers are bracing for what looks to be a discouraging holiday buying season.
"The Fed's action can help," says Carol Sanger, of the Cincinnati-based Federated Department Stores. "But there's no one action or activity that's going to be a panacea."
Once investors realize that their investments aren't going to evaporate overnight, or whatever other worst-case scenario they'd envisioned, she says, she expects their confidence in the economy - and their willingness to shop - will bounce back. Until that happens, she says, stores have one strategy: "We're having a lot of sales."
Alexandra Marks in New York, Amanda Paulson and David R. Francis in Boston, and Francine Kiefer in Washington contributed to this story.