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Federal Reserve Rolls Back Rates - Again - 2001-10-02

In an effort to keep the economy out of recession, the U.S. central bank Tuesday cut its key short-term interest rate by a hefty one-half point. This is the ninth cut in the fed funds rate this year and brings that key short-term rate to its lowest level in over 30 years.

The Federal Reserve says it is poised to lower borrowing costs again as it tries to avert the growing threat of recession. In announcing the half point cut in the fed funds rate, the central bank said there is heightened economic uncertainty in the aftermath of the September 11 terrorist attacks. The Fed funds rate, the interest banks charge each other on overnight loans, now stands at 2.5 percent, its lowest level since 1962.

For Larry Kudlow, a corporate chief economist and former government official, the central bank needs to do more to shore up sagging economic confidence. "In this period of remarkable uncertainty, the uncertainty premiums are gigantic," he said. "You have to think outside the box. You have to do more in order to get economic spirits and risk-taking going. So I think they did the minimum." Mr. Kudlow spoke on CNBC television.

According to another economist, former Treasury Department official Roger Altman, despite monetary stimulus the economy will be slow to pick up. "We are in uncharted waters economically, given the nature of the events on September 11. I think it is going to be a very difficult period. And I think the effects of monetary and fiscal stimulus may not be as quick as we've seen before."

The Bush administration and Congress are preparing a package of tax cuts and spending increases to boost economic activity.

Short-term interest rates are now below the rate of inflation. Several banks cut their prime lending rates, the interest charged their best clients, to 5.5 percent following the Federal Reserve action.

The U.S. economy has been expanding continually for a record nine consecutive years. That expansion is now in jeopardy as growth has slowed to near zero in recent months and an actual shrinkage of output is expected in the fourth quarter of this year.