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
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
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
"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
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. …