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Rate cuts part of rescue plan
The stock market took a record 684-point plunge Monday upon reopening for the first time since last week's terrorist attacks, even after the Federal Reserve and foreign central banks slashed interest rates to counter a rapidly unfolding recession and prevent a financial crisis.
The Federal Reserve and the European Central Bank, in a coordinated action to restore confidence, boost stock markets and stimulate the economy, reduced interest rates by half a percentage point. The Fed, led by Chairman Alan Greenspan, promised more rate cuts if necessary--and many analysts said more will be needed to stem a major downturn in the U.S. and around the world.
President Bush and Congress also signaled that a major economic stimulus package is being assembled. Among the elements under consideration are a capital gains tax decrease and other tax reductions. Also, an airline-rescue bill is likely to pass the House this week, and Congress has thrown off restraints on spending the Social Security surplus.
Rarely have the major branches of the U.S. government joined in such an attack on a recession most economists believe has already begun.
David Hale, chief economist at Chicago's Zurich Financial Services, said he expected the United States would snap out of the downturn with a sharp rebound by next spring or summer, thanks to interest rate cuts, new tax reductions and higher federal spending.
A former Federal Reserve member, economist Lyle Gramley agreed that the Fed's rate cuts, tax reductions and a buildup in government spending for defense and anti-terrorism activities "are just going to turn this economy around." But if there is another terrorist attack, he said, "All bets are off."
The coordinated interest rate reductions, also joined by Canada's central bank, were aimed at bolstering the weak global economy. But analysts said the health of the U.S. economy, as the locomotive for the rest of the world, was of primary importance. The coordinated action also helped prevent a plunge in the dollar.
Airlines, insurance hit hard
On Wall Street, airlines, insurance and travel-related stocks were among those suffering the greatest losses in the 7.13 percent decline in blue-chip stocks. But analysts said they were still pleased that the market's fall was orderly, that panic was avoided and that all the New York Stock Exchange's systems worked smoothly in a financial district still reeling from the attack on the World Trade Center.
The prospect of more stock-market losses in coming days hung over the market as investors continued to absorb the negative business implications of the attacks. On Monday, US Airways said it would lay off 11,000 workers, America West Holdings Corp. eliminated 2,000 jobs and American Trans Air shed 1,500 employees.
"The entire U.S. aviation system is in jeopardy," US Airways said in a statement. The industry is seeking a $20 billion rescue plan from Congress.
The Dow Jones industrial average of blue-chip stocks fell 684.81 points, the largest point decline in history, but a long way from the 22 percent one-day drop in the market in October 1987 and not even in the top 10 of one-day percentage losses. Other major indices took large drops as well--but not as much as analysts had initially feared.
Treasury Secretary Paul O'Neill was on hand to ring the opening bell at the New York Stock Exchange, and he spent the entire day cheerleading both the markets and the U.S. economy, saying that he expected no recession. Yet most analysts expected further stock price declines before a bottom is reached. A so-called "patriotic rally" that some analysts had hoped for never materialized.
Cut in rates a cushion
The Fed's reduction in interest rates was announced just before the NYSE opened for business--clearly aimed at cushioning the fall in stock prices.Not only did the Fed reduce its benchmark short-term interest rate to 3 percent, but it also declared that it would flood the banking system with all the emergency funds required so that companies and individuals could make withdrawals without trouble. It said it would let short-term interest rates fall below its targeted 3 percent if necessary.
"Zero is the only limit," said David Wyss, chief economist at Standard & Poor's, of how low interest rates could drop.
The central bank signaled it was ready to bring down interest rates again if necessary. Some analysts said they would not be surprised to see another half-point to three-quarters of a point reduction in interest rates before Greenspan's monetary agency is finished.
Since Jan. 3, the Fed has slashed interest rates eight times in its battle against a sudden slowdown in the economy after a long boom that prevailed for most of the 1990s. Consumer spending and housing sales have kept the economy from sinking into recession for much of the year--that is, until four U.S. jets were hijacked Sept. 11, resulting in the destruction of the World Trade Center and major damage to the Pentagon.
Vice President Dick Cheney said in an interview Sunday with NBC-TV that the United States now faces the joint problems of simultaneous war and recession--although O'Neill in a number of interviews Monday on Wall Street denied that a recession is on the horizon.
Stimulus package likely
President Bush told reporters Monday at the Pentagon that he is "confident we can work with Congress to come up with an economic stimulus package, if need be, that will send a clear signal to the risk-takers and the capital-formatters of our country that the government's going to act, too."
By "capital-formatters," Bush referred to the raising of capital by business for investment purposes, a process that creates jobs and income for Americans. Business investment had come to a virtual halt in the U.S. even before the attacks.
The president said that while the economy was already adjusting to the current crisis, "the underpinnings for economic growth are there. We've got a strong manufacturing base. But there's a challenge ahead of us, and I'm confident that our business community will rise to the challenge."
Bush said his $1.35 trillion, 10-year tax cut will help boost the economy as more rate reductions take effect over the next several years, and that a major new $40 billion anti-terrorism spending bill that includes funds for cleaning up the rubble in New York will help spur a recovery.
Will consumers spend again?
Zurich Financial's Hale said the lower interest rates will spark a new wave of mortgage refinancings--but the big question is whether consumer spending, slammed hard by the attacks, will return to some semblance of normalcy any time soon.
Jerry Jasinowksi, chief economist for the National Association of Manufacturers, said that though he sees a recession developing in the third quarter, "the fundamentals are in place for a rebound in 2002."
Bush also said his administration will look at a proposed airline rescue bill now in Congress, but the administration may balk at the $20 billion the industry is seeking.
Sen. John McCain (R-Ariz.), ranking Republican on the Commerce Committee, chastised the administration for waiting to support the rescue measure. "We must act immediately to support this crucial sector of our national transportation infrastructure, which is vital to our commerce and our way of life," he said.
Meantime, the World Bank and International Monetary Fund announced, as expected, that they were canceling their annual meeting in Washington on Sept. 29-30 in Washington because of the attacks and a drain on police forces that they would require. Anti-globalization protesters already had called off their demonstrations.