The Federal Reserve has cut interest rates for the ninth time this year. Tuesday the Fed decided to lower its target for the federal funds rate by 50 basis points to 2.5 percent.

In a related action, the Board of Governors approved a 50-basis-point reduction in the discount rate to 2 percent.
In a written statement, the Federal Open Market Committee noted that the terrorist attacks "have significantly heightened uncertainty in an economy that was already weak. Business and household spending as a consequence are being further damped. Nonetheless, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate."
Newport Communications Senior Economist Jim Haughey called the rate cuts "a confidence builder for nervous buyers and insurance against the current decline in the economy extending into the first half of next year.”
However, he cautions if this is enough to get the economy clearly started on the upswing early next year, then the Fed has to face moving rates back up. Haughey says a more normal rate of 4 percent to 5 percent in a balanced economy with 2 percent to 3 percent inflation is possible, but it likely won’t take place until late 2002.
But what if this rate cuts proves to be insufficient to restart the economy? Some ask why stop at a 2 percent discount rate? Why not 1.5 percent or even zero?
According to Haughey, lowering interest rates has no punch in the economy when high financial carrying cost is not the reason that buyers are reluctant to spend.
“Remember the 1930s when the fed pushed rates to zero without stimulating lending?” he says. He points out that Japan's central bank has had a near zero rate equivalent to the U.S. discount rate for several years, with no sucess in stimulating spending and moving Japan out of a decade-long recession.
“Investment shrinks when there is excess capacity," Haughey sayd. "The fed has done what it can with monetary policy; indeed it has probably gone the last several steps only to prevent the bankruptcy of some large Wall Street firms. Now the focus shifts to fiscal policy. Unless the economy rights itself quickly, expect huge new spending projects and more tax cuts,” he says.
The latter is very close to becoming realty. Congress and the President are close to agreeing on a stimulus package that will likely total around $100 million.