Fed Finds Economic Jolt From Attacks
The terrorist violence Sept. 11 harmed a U.S. economy that already was showing more signs of weakness, the Federal Reserve said Wednesday. That will give policymakers reason to lower interest rates when they meet in two weeks, analysts said.
“The Fed recognizes that they need to help the economy out here,” said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis.
Though retail sales and manufacturing declined after the Sept. 11 attacks, “business activity recovered quickly from some aspects of the shock,” the report said. “Longer-run effects are more difficult to assess.”
The report, known as the “beige book,” is a collection of anecdotes reported to the regional Fed banks from businesses. It gives central bankers an idea of economic developments beyond what statistics show.
St. Louis Fed Bank President William Poole said last week that policymakers will put more weight than usual on what they learn from this beige book, because many September and October statistics will be distorted by the terrorist attacks.
Inflation isn’t a concern. The beige book found “steady or declining consumer prices” in most Fed districts, which would give the central bank more latitude to lower rates again.
Yields on Treasury securities fell as investors bet the Fed would lower the benchmark overnight bank lending rate by at least a quarter percentage point when it meets Nov. 6. Since Sept. 11, they have reduced the overnight rate by a full percentage point in two steps. At 2.5%, the rate is lower than at any time since May 1962.
A string of nine rate cuts so far this year “hasn’t been effective enough to prevent the slowdown or offset it yet,” Fed Bank of Dallas President Robert McTeer said. The slowdown would have been worse if the Fed hadn’t acted, he said. “It wasn’t effective enough to please us, but I don’t think it was ineffective.”
Commerce Department figures show consumer spending, which accounts for two-thirds of U.S. gross domestic product, rose 0.2% in both July and August, the smallest increases this year.
After the Sept. 11 attacks, retail sales dropped sharply for almost all items, the report said. “One to two weeks later, consumer buying picked up somewhat, although in most cases it was weaker than in early September,” the Fed said.
Automobile sales, which were much weaker in early September, are almost back to normal because auto makers are offering interest-free financing, the report said.
Still, the drop in sales has cast a pall on retailers’ holiday forecasts, the report said.
The attack “is likely to have a longer-term effect on manufacturing,” the Fed said. Weakness at factories was broad based, ranging from semiconductor manufacturers to steel. Most districts said shipments and orders were weaker than the year before.
