Posted by John Irons at October 02, 2001 01:28 AM

The action by the Federal Reserve today (10.2.01) was the 9th rate reduction this year and brings the target federal funds rate to 2.5%. In addition, the Fed continued to maintain its bias towards further rate cuts, noting that the risks are "weighted mainly toward conditions that may generate economic weakness."

With this cut, it appears that short-term real interest rates may drop below zero for the first time in over 20 years. See this note on real interest rates for more details.

"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." -- Federal Reserve Announcement of 10.2.01

See also: Federal Reserve Announcement of 9.17.01 - the first day of trading after the events of 9.11.

Recession likely?

Recent consumer confidence surveys have show a steep decline in confidence and in future expecations (see report on the Michigan survey for details.) It appears that with the recent events and the apparent decline in confidence in the economy we may indeed finally and "officially" enter into a recession.

The data on GDP, however, is still not yet in. If we do slip into a recession, I would suspect that it would be short lived - both monetary and fiscal policy are now strongly expansionary. This will be especially true if a $100 billion economic recovery package is passed in the Congress.

It is important to keep in mind that the economy has not been fundamentaly altered in any significant way as a result of the terrorist attacks. The long-term prospects are still quite good.

Posted by John Irons at October 02, 2001 01:28 AM