The Federal Reserve's decision to stimulate a sluggish economy by once again cutting short-term interest rates another half point to 2.5 percent - the ninth rate cut this year - makes the rate the lowest in four decades and affirms the Fed's determination to prop up the economy no matter what.
The discount rate was also cut a half point, to 2 percent. The Fed hopes the cuts will boost consumer confidence. An entire generation of consumers has never known such low interest rates, and some will no doubt take advantage. Since the rate is now below the inflation rate, loans will practically be iterest free.
The economy had already been slowing before the Sept. 11 terrorist attacks. Last spring the economy nearly stalled, and in the third quarter - when the attacks occurred - it dropped substantially. The events of Sept. 11 worsened an already bad economic picture and prompted even more concerns among economists as consumers closed their wallets and pocketbooks out of fear to spend in the aftermath of events on the East Coast.
Now that we're in the final quarter of the year, economists are right not to relax too much, as there could yet be more shrinkage, even though the Federal Reserve's latest move to cut benchmark interest rates was the second just since the attacks.
The Fed had little choice, actually. But there already are signs that the rate reductions could generate consumer buying. For instance, the sticker shock that automobile shoppers so often experience isn't quite so bad right now. Car buyers are finding out that they can get zero percent financing.
So consumers who have put off buying new cars and who have put off making other major purchases or seeking loans for various reasons are finding that their having waited will pay off handsomely. “There are virtually no businesses or consumers who are not making investments or purchases now who will be induced to do so because interest rates are lowered from the already exceptionally low levels,” said chief economist David Orr of First Union Corp.
Still, many consumers are bound to remain edgy about the future, and that anxiety affects buying habits. That's why analysts who say the recent interest rate reductions won't lead to huge buying campaigns shouldn't exactly be written off yet as naysayers.
Without question, many consumers are proceeding cautiously, and there's no harm in that. But a lot of them are taking advantage of the lowest benchmark interest rate levels in almost 40 years, and that's the Fed's intent.