Fed cuts rates ninth time this year

The Federal Reserve on Tuesday cut interest rates as expected for the ninth time this year, citing concerns that the Sept. 11 terrorist attacks might have a negative effect on an already ailing economy.

The federal funds rate was lowered 50 basis points to 2.5 percent, a level not seen since the early 1960s. The Fed also lowered the discount rate, the interest rate it charges banks to borrow, by 50 basis points to 2 percent. The funds rate is the interest on loans that banks can charge each other to borrow.

"The terrorist attacks have significantly heightened uncertainty in an economy that was already weak," the Fed said in its statement. "Business and household spending as a consequence are being further damped."

The release added, however, that "the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate."

In 1999 and 2000, the Fed raised the funds rate six times for a total increase of 1.75 percentage points to a high of 6.5 percent in May. It also raised the discount rate five times, to 6 percent, an increase of 1.5 percentage points.

However, recent economic data have indicated that the U.S. economy might be slowing too much. The Gross Domestic Product, the value of all U.S. goods and services, grew 1.9 percent in the fourth quarter of 2000, 1.3 percent in the first quarter of 2001, and a timid 0.3 percent in the second quarter.

Many economists believe the terrorist attacks on Sept. 11 may have undermined consumer and business confidence in the economy and beaten down growth further.

The Fed responded to the attacks with an unscheduled rate cut Sept. 17 in an effort to calm jittery markets that remained closed that week. The markets reopened the following week to post huge losses.

The Fed started its assault on interest rates Jan. 3 by calling an unscheduled meeting and has lowered rates each time since, including six 50-basis-point cuts.

The Federal Reserve's primary focus is to contain inflation, and its main instrument is interest rates. When it senses the economy is growing at a rate that could ignite inflation, it often raises rates, which raises the cost of borrowing money and can pinch corporate financial activity.

But when the economy seems headed for trouble, the Fed decreases rates. Lowering interest rates makes it less costly for businesses to finance expansion plans and increases the incentive to borrow money, which can spark economic growth. Lower rates can result in more stable stock prices, too, because interest-paying investments become less attractive.

The Federal Reserve's policy-making committee meets again Nov. 6.