- The Washington Times - Tuesday, October 2, 2001

Today, the Federal Reserve's policy-making committee convenes its first regularly scheduled meeting since the Sept. 11 attacks, and all evidence suggests another rate cut. Vice Chairman Roger Ferguson, the only Fed governor in Washington on that fateful Tuesday morning, issued a reassuring statement that day: "The Federal Reserve System is open and operating. The discount window is available to meet liquidity needs." So, too, must the Fed take authoritative action today.

What Mr. Ferguson did was make arrangements with the European Central Bank (ECB) and the Bank of England for $50 billion swap transactions involving euros, pounds and dollars in order to maintain liquidity in the international banking system. And, as the Financial Times reported yesterday in an analysis of central bank operations following the attacks, the Fed used its discount window and open market operations to funnel a nearly incomprehensible $80 billion of liquidity into the financial markets on Sept. 11. In all likelihood, this prevented a freeze-up that could have generated catastrophic consequences.

Still, consider what has happened since. U.S. stock exchanges closed after the Tuesday attacks and did not open until the following Monday. In the morning before U.S. stock exchanges reopened on Sept. 17, the Fed announced a half-percentage point cut in the federal funds rate, marking the eighth time this year the Fed has chopped the crucial overnight rate. The ECB, which inexplicably refused to cut its principal short-term rate at its regularly scheduled meeting the previous Thursday, followed the Fed's Sept. 17 lead; the ECB reduced its target short-term rate after its first unscheduled monetary-policy meeting since its 1998 creation.

Today, as expected, there has been a marked deterioration in America's already-teetering economy. The University of Michigan's index of consumer sentiment, which included responses since the attack, registered a sharp decline, falling to its lowest level since November 1993. Last week the Labor Department announced that first time jobless claims recorded their highest weekly gain in nine years. Both developments presage an unwelcome slackening of consumer demand. All available evidence suggests that the Fed should continue its aggressive policy of providing the necessary liquidity by reducing the fed funds rate by another half-percentage point.

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