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Tuesday, 2 October, 2001, 21:01 GMT 22:01 UK
Analysis: The Fed's next move
US interest rate moves since July 2000
David Schepp

The latest round of cuts by the Federal Reserve leaves many wondering what else the nation's central bank can do to revive the listless US economy.

With Tuesday's reduction in the central bank's key Federal Funds rate - now at 2.5% - interest rates are the lowest they have been since the days of the Kennedy administration in 1962.

Federal Reserve Chairman Alan Greenspan in Washington, DC
Fed Chairman Alan Greenspan has moved aggressively to forestall a recession
The Fed's efforts, along with President Bush's multi-billion dollar tax cut, however, have made little impact on the economy.

'Small offsetting impact'

"A Fed cut in and of itself would not be something to make us go back and revisit [spending]," says Norm Wesley, chief executive at consumer-products maker Fortune Brands.

Mr Wesley says that many consumers are holding off on purchases until they have some clue what the economy is going to do.

"It has a small offsetting impact," says Kevin Brown, chief financial officer at auto-parts maker Donnelly, "but not nearly significant enough to stimulate us to go spend more money."

With the Federal Funds rate now at 2.5%, the Fed is effectively lending money at zero interest, based on August's 2.7% rate of inflation.

Despite that fact, further interest-rate cuts are not off the table. The Fed uses a different measure when calculating the floor for interest rates.

According to this calculation, rates could drop another full percentage point before the Fed hits "real" zero.

The central bank, recognising the continued weakness in the economy, is likely to cut rates even further, hoping that it can spark demand among both consumers and business.

Propping up the consumer

The Fed has also pumped billions of dollars into the economy to ensure plenty of cash to complete transactions.

It has been consumer spending the Fed has been targeting in its aggressive chops in interest rates this year. Report upon report has shown that continued buying sprees by consumers is the only reason the economy has not faltered into recession.

But the 11 September attacks on New York and Washington have seemingly changed all that. In the days immediately following the attacks, consumers stayed home in droves, begging off purchases, large and small, and postponing air travel.

While Americans are not as cautious as they were just two weeks ago, continued job cuts and corporate profit warnings have analysts lining up to predict a recession.

Cheaper money

And low-interest loans may indeed not be enough to bring debt-burdened Americans onto car dealer's lots or into furniture showrooms. Faced with the prospect of job losses, many are content to wait out the pending economic storm.

Shortly after the Fed's statement, Ford Motor said its sales for September fell 10%. The sales fell even as Ford offered 0% interest financing on its 2001 and 2002 models in wake of the attacks.

It is airlines, however, that are hurting most. As Americans steer clear of flying, carriers have slashed flight schedules and laid off nearly 120,000 employees, sending rippling effects through the economy.

Analysts also point out that consumers may remain cautious until it is clearer what response the federal government will take in response to the terrorist attacks in New York and Washington.

With the nation's chief law-enforcement officer, Attorney General John Ashcroft, warning that further terrorist attacks are possible, consumers have every reason to lay low.

See also:

01 Oct 01 | Business
Attacks 'spoiled US factory revival'
27 Sep 01 | Business
US joblessness at nine year high
25 Sep 01 | Business
Business gurus warn of US recession
21 Sep 01 | Business
US slump could be 'steep but short'
20 Sep 01 | Business
Greenspan assesses the damage
19 Sep 01 | Business
Fears grow for US economy
17 Sep 01 | Business
US and ECB cut rates to stem panic
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