October 28, 2001	Sunday	Shaba'an 10, 1422

WASHINGTON, Oct 27: As late as Sept. 4, a week before the attacks on New York City and Washington that may have tipped the economy into recession, only one of 12 Federal Reserve regional banks was seeking a cut in the key discount loan rate.

According to minutes of the Fed’s periodic discount rate deliberations, released on Friday, the Federal Reserve Board on Sept. 4 declined to act on a request by the Federal Reserve Bank of New York to cut the discount rate, the rate at which the Fed loans money directly to banks. Nine other Fed banks sought to maintain rates at the level then of 3 per cent.

The Fed board dramatically changed course on Sept. 17, the first day stock markets reopened after the attacks, and cut the discount rate, as well as the more widely watched fed funds rate, by a half-percentage point.

Of banks voting on rate requests after the attacks, three sought quarter-point cuts, five sought half-point cuts and one, the Cleveland Fed, sought to keep rates unchanged.

The discount rate is set by the regional banks, subject to review and determination by the Federal Reserve Board.

Directors in favor of a 50-basis point reduction were concerned that consumer confidence might well deteriorate significantly further. Other directors noted that it was too soon to judge the eventual economic impact, but predicted that the events would foster substantial additional weakness, the minutes said.

Others wanted a smaller quarter-percentage point reduction as providing an appropriate symbol of further Federal Reserve action while retaining maximum flexibility to respond to a difficult situation.

The minutes gave no explanation for the Cleveland Fed’s vote on Sept. 13, in favor of keeping the discount rate unchanged. The president of the Cleveland Fed, Jerry Jordan, will have a vote on the rate-setting Federal Open Market Committee beginning in January.

While only one bank had a request pending for lower rates immediately prior to the attacks, the assessment of the economy’s state before Sept. 11, grew more negative afterward. When the Fed cut rates on Sept. 17, in a relatively rare intermeeting move, it said employment, production, and business spending were weak even before the attacks.

The Fed cut interest rates again at a regular meeting on Oct. 2, reducing them by another half-percentage point, lowering the discount rate to 2 per cent. It then said the attacks had “significantly heightened uncertainty” in the economy.

Most analysts expect the Fed to cut rates again at its next scheduled meeting on Nov. 6.—Reuters