Posted on: Monday, September 24, 2001

The September 11th attack
Interest rate cut may do little to help

Bloomberg News Service

WASHINGTON — Federal Reserve policy makers may lower interest rates before their next policy meeting Oct. 2 if investors suddenly lose confidence in the economy and markets stop functioning normally, analysts said.

"What the Fed is really concerned about is a panic situation where there is another massive sell-off," said Christopher Low, chief economist at First Tennessee Capital Markets in New York.

A Fed rate cut, the ninth this year, would be intended to shore up investor and consumer confidence. U.S. stocks have fallen for five days on concern the Sept. 11 terrorist attacks will lead to recession. Dow Chemical Co., the largest U.S. chemical maker, is the latest company to report earnings will miss estimates as the weakening economy reduces demand for chemicals and plastics.

The Dow Jones Industrial Average is down about 15 percent since trading resumed for the first time since the terrorist attacks. The Nasdaq Composite Index has dropped 16 percent.

The Fed lowered its benchmark interest rate a half percentage point Monday to a seven-year low of 3 percent to buck up confidence before stock trading began. The central bank has also flooded the banking system with billions of dollars, pushing the effective overnight loan rate below the Fed's target.

Stocks may keep falling, analysts said. "The reality is coming home that this is going to be a severe economic downturn," said Tim Stevenson, who manages the $450 million Evergreen Special Equity Fund in Charlotte. "Investors are coming to grips with that."

For now, though, stock declines haven't unnerved Fed policy makers, and that's a reason they may wait until their scheduled meeting to cut rates again, analysts said.

"When they might do something will be wholly dependent on how disorderly the markets are," said Diane Swonk, chief economist at Bank One Corp. in Chicago. "Monday the markets were orderly, but if the markets have to shut down, the Fed will step in," she said.

Two recent surveys show economists have concluded the economy has probably fallen into a recession for the first time in a decade. Eighteen of 21 economists surveyed today and yesterday by National Association for Business Economists say the economy is now contracting.

Gross domestic product will probably shrink at a 0.5 percent annual rate in the third quarter, which ends this month, and contract at a 0.7 percent pace in the final three months of the year, according to the consensus of 44 economists in a one-day survey conducted by Blue Chip Economic Indicators on Thursday. Two consecutive quarters showing a contraction is the common definition of a recession.

Fed Chairman Alan Greenspan told Congress the terrorist attacks had shocked the economy. However, Americans are divided over whether last week's terrorist attacks will push the economy into recession, a Conference Board survey shows.

Of more than 750 households polled, 47.2 percent said they expected a recession and 52.8 percent said they didn't. Those surveyed also were split on whether the attacks would affect their household finances, with 50.5 percent saying they would, and 49.5 percent saying they would not.

Two other recent consumer surveys showed a rise in optimism. A Gallup poll taken Sept. 14-15 showed 45 percent of Americans rated the economy as "good or excellent," up from 32 percent in a survey taken Sept. 7-10. Seventy-five percent of those who have money invested in the stock market said last week's attacks will not stop them from investing in the future, the Gallup poll showed.

"Clearly, there is no panic among the American public," said Dennis Jacobe of the Gallup News Service.

For now, a cut in the Fed's target for overnight loans wouldn't make much difference. The central bank has about $33 billion in loans to banks outstanding through repurchase agreements that mature between Sept. 24 and Oct. 18. That surfeit of cash has pushed the overnight rate as low as 2.22 percent yesterday.

"If the Fed were to cut interest rates, does it change anything?" said Stephen Slifer, chief economist at Lehman Brothers Inc. in New York. "You get some psychological benefit. The reality is it doesn't do much."