Fed seen cutting rates in bid to calm markets

Another 1/2-point reduction would put rates at 40-year low

By Martin Wolk

MSNBC

Oct. 1 — For the second time since last month’s terror attacks, the Federal Reserve is expected to announce a reduction in short-term interest rates Tuesday, acting more to calm financial markets than for the usual reason of spurring demand. Most economists and market analysts expect central bank Chairman Alan Greenspan and his colleagues to slash the Fed’s main benchmark rate another half-point to its lowest level in nearly 40 years.

THE ECONOMY WAS SPUTTERING even before the Sept. 11 attacks, and the Fed already had cut short-term rates seven times in an aggressive effort to get consumers and especially businesses to pick up the pace of spending and investment. But the Fed’s announcement of another half-point cut just before U.S. financial markets reopened Sept. 17 was done for a different reason, as there was little likelihood it would have much impact on demand.

Instead the Fed’s eighth rate cut of the year was aimed at providing as much liquidity as needed to ensure the smooth reopening of financial markets in an uncertain atmosphere where panic was a real possibility. Indeed, while Fed policy-makers lowered the announced federal funds rate to 3 percent Sept. 17, the actual rate fell below 1 percent in the days following the move, in line with the central bank’s stated plan to supply “unusually large volumes of liquidity to the financial markets, as needed, until more normal market functioning is restored.”

The federal funds rate is what banks charge each other for overnight loans and fluctuates based on supply and demand, although the central bank can control the market by injecting or withholding cash.

-- PHO (owennos@bigfoot.com), October 01, 2001

Answers

Looks like we're going to soon catch up with Japan. When we get down to 0%, what are we going to do then?

-- Uncle Fred (dogboy45@bigfoot.com), October 02, 2001.