November 6, 2001

Economy

Fed Slashes Short-Term Interest Rates
In Attempt to Shore Up Ailing Economy

A WALL STREET JOURNAL ONLINE News Roundup

WASHINGTON -- The Federal Reserve cut short-term interest rates by a half percentage point and said it sees continued risk of economic weakness, laying the groundwork for further rate cuts.

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

The Fed said that efforts to improve national security "may restrain advances in productivity for a time." Nevertheless, the central bank said that over the long term, "prospects for productivity growth and the economy remain favorable."

Tuesday's cut brought the target for the federal-funds rate, at which banks lend to each other for overnight loans, to 2%. Policy makers also lowered the discount rate, charged by the Fed to member banks, by a half point, to 1.5%.

The cut in the fed-funds target was widely expected, though some forecasters were betting the Fed would lower rates by just a quarter point, giving policy makers more latitude to cut rates again in the coming months.

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

The central bank hasn't been timid about cutting rates so far this year. Tuesday's rate cut brought the fed-funds target to its lowest level since 1961. It started the year at 6.5%.

Despite the central bank's unyielding campaign to cut rates -- it has done so 10 times since January -- the economy has continued to slow.

First, the manufacturing sector put on the brakes while consumer spending and housing sales held up. Lately, though, even those resilient sectors have faltered under the weight of the terrorist attacks and anthrax outbreaks.

In the third quarter, the economy shrank at a 0.4% annual pace, and it is virtually certain that a second consecutive quarter of contraction -- the common definition of a recession -- is now under way.

The unemployment rate, for example, surged to 5.4% in October from 4.9% the month before. Many economists expect to see a 6% jobless rate early next year. That has bred fears the current slump could be deeper than the relatively tame 1990-91 recession.

A growing number of forecasters expect the economy will shrink through the first quarter of 2002, fueling expectations the Fed will cut the fed-funds target to 1% next year.

In response to Tuesday's Fed action, several banks cut their prime lending rates by a similar half-point to 5%, the lowest level since 1972. The prime is the benchmark for millions of consumer and business loans.

Economists are hoping that in addition to getting a boost from the lower interest rates, the economy will get a jolt from the stimulus package under consideration in Congress.

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