Wall St. Returns; Stocks Plunge

America’s stock markets bowed but did not break Monday as the world’s economic elite acted to ensure that the U.S. economy would not become another casualty of global terrorism.

An hour before the markets opened for the first time since last week’s attacks on the World Trade Center and the Pentagon, the Federal Reserve chopped another half-point off its short-term interest rates. The move, the Fed’s eighth interest rate cut this year, was part of an extraordinary display of purpose by the central banks on two continents.

But the moves were not enough to keep the markets from shuddering, eliminating an estimated $600 billion of stock value by one estimate. The Dow Jones industrial average plunged 684.81 points, although the 7% decline fell far short of its worst daily performance ever, a 22% crash in October 1987. Nasdaq fell 115.82 points to 1,579.55, a 6.8% drop.

Economists said the Fed’s rate cuts and the prospect of new tax reductions or government spending could help shore up sagging consumer and business confidence. But they questioned whether such steps would be potent enough to reverse an economic slide that was well underway before last Tuesday’s attacks in New York turned the financial center into a disaster zone with mountains of rubble where the World Trade Center towers once stood.

President Bush convened an emergency meeting of his economic policy team and signaled his willingness to help the ailing airline industry and halt a broader economic decline. Leaders of both parties in Congress expressed their desire to do the same, and representatives of business and labor set aside their traditional differences to pledge they would help efforts to reignite the economy.

Bush did his best to alleviate the anxiety felt by many Americans.

“I’ve got great faith in the economy,” the president said during a midday visit to the Pentagon disaster site. “I understand it’s tough right now. Transportation, business is hurting; obviously, the market was correcting prior to this crisis. But the underpinnings for economic growth are there.”

The president said the White House would work with Congress “to come up with an economic stimulus package if need be that will send a clear signal to risk takers and capital formators of our country that the government’s going to act too.”

Restarting the New York Stock Exchange was orchestrated as a symbol of the country’s financial and emotional recovery. Government leaders, including Treasury Secretary Paul H. O’Neill and New York Sen. Hillary Rodham Clinton, attended the opening.

The traditional opening bell was rung by a firefighter, two police officers and an Emergency Services officer to memorialize the hundreds of rescuers trapped and killed in the tragedy. There was a two-minute period of silence for the more than 5,000 people dead or missing.

Fed Cuts Key Interest Rate Before Opening

The Federal Reserve acted before the stock market opened for business, announcing it would reduce its key short-term interest rate from 3.5% to 3% to shore up consumer and investor confidence.

The cut was approved by members of the Fed’s Open Market Committee during a 7:30 a.m. conference call that lasted 25 minutes and included a moment of silence for those who died in the attacks.

It was the Fed’s eighth rate cut this year, and one of three approved on an emergency basis between the panel’s regular meetings. This year’s cuts have lowered short-term rates by a total of 3 1/2 percentage points.

The 3% “federal funds” rate, the interest charged on the overnight loans between banks, is the lowest since February 1994. The Fed also reduced its discount rate on direct loans to banks from 3% to 2.5%.

“Even before the tragic events of last week, employment, production and business spending remained weak, and last week’s events have the potential to damp spending further,” Fed officials said in a prepared statement. “For the foreseeable future . . . the risks are weighted mainly toward conditions that may generate economic weakness.”

They said they were prepared to cut the federal funds rate even further, before their next scheduled meeting Oct. 2, if necessary.

The Fed rate cut was quickly matched by the European Central Bank, the Swiss National Bank, Sweden’s Risbank and the Bank of Canada in what was characterized as an unprecedented show of unity by central bankers on two continents. Leading U.S. banks followed suit by chopping their prime lending rates from 6.5% to 6%.

Lower interest rates stimulate the economy by making it easier for consumers and businesses to borrow money to finance new purchases and investments.

They also said they would continue to pump cash into the economy to ensure there was no shortage of funds for borrowers, even if it pushed the fed funds rate below the 3% target.

The Federal Reserve Bank of New York, which executes Fed decisions in the financial markets, injected more than $57 billion in extra cash into the economy Monday through a series of what amounted to short-term loans.

It was the fourth such move by the New York bank. Last Wednesday, the day after the attacks, it added $38 billion. On Thursday, it added more than $70 billion, and over the weekend, it added more than $80 billion. The aim was not to directly boost the economy, but to protect the financial system from freezing up for lack of lendable funds.

“They’re doing everything they can to stabilize the economy,” said Oberlin economist Gregory D. Hess.

Market Reopening Welcomed by Traders

Hours before dawn, police officers in dark windbreakers and National Guard soldiers in fatigues wandered through the financial district, setting up steel barriers across Wall and Broad streets. Plumes of smoke, thick and white against the darkened skyline, wound snakelike between the towering buildings.

“It’s sort of spooky seeing five brokers and 800 policemen,” said Angelo Pomes, of the institutional brokerage firm Prosperitas Management. “I don’t even know if there’s electricity in my office. It feels more like Beirut.”

Inside, the mood gave way as stocks fell heavily at the open of trading in what became record-setting volume.

Especially hard hit were the airlines, media and leisure industry stocks because of revenue losses caused by the terror attacks. Overall, losers overwhelmed winners by a ratio of 6 to 1. High-profile defense industry stocks had a positive day, however, because of federal promises of new military spending.

As stocks slid, NYSE Chairman Richard Grasso downplayed the significance, even though a barrage of business and government leaders had implored investors to hold on. “Today’s market is not important,” he intoned. “It’s the market a year or two years from now.”

The exchange reopening was welcomed by many NYSE traders, who were relieved to be back to some form of normality.

“As soon as the market opened, everyone loosened up and got back to what they were used to,” said Jay Mahoney, a trader with Wagner Stott Bear Specialists.

Some investors said they were heeding the call to refrain from selling.

“You know what I did today? I did my duty as an American. I bought stock,” said retired Marine officer Calvin Frantz of Fairfax, Va.

But some analysts questioned whether government officials could bolster the economy with appeals to patriotism.

“It does almost no good to tell consumers it’s their patriotic duty to consume more. People are deep in debt. They’re worried about their jobs,” said former Labor Secretary Robert B. Reich, who teaches economics at Brandeis University. “If the Bush administration wants to mount a pep rally, a more effective pitch would be to ask companies to refrain from mass layoffs, or at least defer them for a time.”

Washington Looks for Ways to Help Economy

Meanwhile, both the White House and Congress were scrambling to help rescue the economy.

Bush met with his economic advisors for more than an hour to discuss how Washington might assist the damaged airline industry. Already troubled companies are being pushed to the brink of bankruptcy by last week’s shutdown of the nation’s air transit system and a steep drop-off in travelers.

Transportation Secretary Norman Y. Mineta and Bush’s chief economic advisor, Lawrence B. Lindsey, were expected to meet separately with airline executives today.

While expressing concern, Bush and other top officials have so far avoided embracing any of the multibillion-dollar airline aid proposals being floated on Capitol Hill. Several independent analysts said that was wise, because most of the plans would not do much good.

“What the airlines need is better security, not guaranteed loans,” said Robert D. Reischauer, president of the Urban Institute, a Washington research organization.

Reischauer and other analysts expressed skepticism about the ability of the White House or Congress to take policy actions that would prop up the economy quickly.

“They can do a little, but not a lot,” said Joel L. Naroff, president of Naroff Economic Advisers in Holland, Pa. “I mean, will cutting people’s capital gains tax restore confidence that’s been shaken by a terrorist attack?”

But tax cuts were exactly what many members of Congress were contemplating.

House Republican leaders said they might move an economic stimulus package as early as this week. House Ways and Means Chairman William M. Thomas (R-Bakersfield) said he was considering a package of tax relief measures that could include a capital gains tax cut.

Thomas scheduled a closed committee session Thursday with a bipartisan group of economists to discuss options for addressing the nation’s long-term and short-term economic problems.

If the committee winds up promoting a capital gains tax cut, it would undercut talk of bipartisan fiscal policy and strain the political truce declared by the two parties during this period of national crisis. Most Democrats have long opposed cutting the capital gains tax because the benefits would be skewed toward the wealthy.

Nevertheless, the additional economic pressures created by last week’s attacks have clearly created a climate more favorable to another round of tax cutting.

“I think a tax cut will be under consideration,” Sen. John McCain (R-Ariz.) told reporters in Arizona. “Literally every option to stimulate the economy is on the table.”

Congress may reach consensus more quickly on the issue of economic relief for the airline industry. Legislation to assist the industry could move as early as by week’s end, according to leadership aides.

The crisis atmosphere is creating temporary alliances between traditional adversaries. On Monday, business and labor joined forces to endorse new federal spending to help spur recovery and rebuilding.

U.S. Chamber of Commerce President Thomas Donohue and AFL-CIO President John Sweeney promised to work together to devise a plan to keep the economy going.

Donohue said the chamber would suspend its traditional opposition to expanded federal spending and support “reasonable” proposals to keep airlines operating and stimulate a broader recovery.

Sweeney promised the support of the AFL-CIO’s member unions’ 14 million workers. He said the AFL-CIO was looking at ways to invest union pension funds in the rebuilding effort.

“The basis of our economy has not been damaged. Production facilities, manufacturing plans, the service sector and main street businesses continue to drive our economic engine,” Donohue said. “American businesses and workers are united in their commitment to rebuild and to move this country forward with confidence.”

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Times staff writers Janet Hook, Robert A. Rosenblatt and Richard T. Cooper in Washington contributed to this report. Staff writer Walter Hamilton contributed from New York.

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