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Fed blames 911 { November 8 2001 }

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Fed Blames Sept. 11 for Onset of Recession
Economy Was Growing Slowly, if at All, Before Attacks

By John M. Berry
Washington Post Staff Writer
Thursday, November 8, 2001; 3:43 PM

Federal Reserve officials concluded early last month that the Sept. 11 terrorist attacks had pushed the nation into a recession, according to the minutes of an Oct. 2 policymaking session released today.

"The economy appeared to have been growing very little, if at all, prior to the terrorist attacks, and the dislocations arising from the latter seemed to have induced a downturn in overall economic activity," the members of the Fed's top policymaking group, the Federal Open Market Committee, concluded, the minutes said.

"Looking ahead, the members generally saw a relatively mild and short contraction followed by a gradual recovery next year as a plausible forecast but one that was subject to an unusually wide range of uncertainty, notably in the direction of a potentially much weaker outcome in the nearer term.

"In the short period since the attacks, anecdotal reports provided indications of a rebound from the sharp cutback in spending that characterized the immediate aftermath of those tragic events, but on balance business activity seemed to be in the process of moving lower," the minutes said.

In response to that assessment, the FOMC decided that day to cut its target for overnight interest rates by a half-percentage point, just as it had a few days after the attacks. At the subsequent FOMC meeting on Tuesday, amid further signs the economy has continued to deteriorate, the policymakers reduced the target by another half-point, cutting it to 2 percent, the lowest level in nearly 40 years.

Details of the minutes, including the policymakers' conclusion that the economy is in a slump, reinforced the view among many economists that the Fed is not done cutting rates. The economists generally expect the FOMC to lower its current 2 percent target to 1.5 percent, probably in two quarter-point steps at meetings scheduled for mid-December and late January.

Despite all the short-term problems for the economy, FOMC members "saw favorable prospects for an upturn in business activity next year, though the recovery clearly would be more delayed than they had anticipated before Sept. 11," the minutes continued. "Major reasons for optimism about the outlook were the substantial easing in monetary policy, whose lagged effects would be felt increasingly in the year ahead, and the fiscal stimulus measures that already had been enacted and might well be supplemented over coming months."

So far the Bush administration and Congress have not been able to agree on either the size or the substance of additional stimulus measures, and administration officials have been arguing that the delay in passing such legislation could mean a slower recovery next year.

Indirectly, the FOMC members appeared to be in agreement on that point, at least in terms of how tax cuts or increased federal spending might affect consumer spending.

"There were no historical precedents for judging the likely effects on consumer confidence and spending of the unique recent events, though it seemed likely that prospects for added job losses and the decline in equity wealth already experienced would hold down consumer expenditures over the months ahead," the minutes said.

"Even so, the members did not rule out a stronger-than-anticipated pickup later, depending in part on the size of additional fiscal policy actions," they said.

The FOMC members agreed that in the short- to intermediate-term, the prospects for business investment, which has been falling all year, remain poor. "Looking further ahead, however, a robust upturn in business capital spending was still a probable outcome," the minutes said, adding, "Businesses likely would respond to profit opportunities stemming not only from rising demand resulting in part from fiscal and monetary stimulus but also from ongoing technological improvements and the need for new capital equipment as the process of retrenchment from earlier over investments was completed."

The decision to cut overnight rates by a half-point was unanimous. The members decided that "easing would help limit the extent of the downturn and later provide impetus to the eventual upturn in economic activity. Further vigorous easing action would tend to support business and household confidence, which a number of members saw as especially important in the current circumstances."

Furthermore, even after a 50 basis point reduction, the level of overnight rates would still be higher than the current inflation rate, according to some price indexes, and therefore would not do as much to stimulate the economy as monetary policy had done "in most earlier periods of economic weakness," the minutes said.

After the further cut this week, the level of inflation-adjusted overnight rates is much closer to zero.

2001 The Washington Post Company

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