Fed Last Month Saw a Contraction Underway, According to Minutes

Federal Reserve policymakers in early October believed the Sept. 11 terrorist attacks had pushed the country into at least a mild recession, and indicated they would do whatever was necessary to prevent a deep downturn, according to meeting minutes released Thursday.

The minutes of the Oct. 2 meeting showed that Fed Chairman Alan Greenspan and his colleagues believed that the major challenge confronting them was how to bolster consumer and business confidence after the attacks.

The Fed on Oct. 2 reduced its target for the federal funds rate, the rate for overnight loans among banks, by half a percentage point to 2.5%. They followed that with an additional half-point reduction Tuesday, to 2%--a 40-year low.

Although some analysts have said the Fed may be growing concerned that it is running out of room to cut rates, there was no hint of that in the minutes. Instead, policymakers signaled they believed that, with inflation low and likely to decline further, they had room to keep cutting rates to set the stage for a recovery in 2002.

“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 near term,” the minutes stated.

The Fed expressed concern that stock prices could keep falling, further hurting consumer confidence.