- The Washington Times - Tuesday, May 15, 2007


Federal Reserve officials were uncertain about the long-term economic impact from the September 11, 2001, terrorist attacks, but they were united in a belief that they had to act decisively to restore confidence, according to transcripts of their discussions released yesterday.

Those transcripts showed Fed officials confronting a multitude of issues following the attacks that destroyed the World Trade Center towers in New York and damaged the Pentagon, forced the closing of major stock exchanges for four days and disrupted financial operations at some of the country’s largest banks.

In response to those events, the Fed flooded the financial system with billions of dollars in extra cash to make sure that banks would have sufficient reserves to meet obligations.

They also cut a key interest rate by a half-point, making that decision during an emergency telephone conference call at 7:30 a.m. Sept. 17, the day the New York Stock Exchange reopened after being closed for four days because of the damage in New York’s financial district.

“It’s clear that the events of last week, at a minimum, have created a heightened degree of fear and uncertainty that is placing considerable downward pressure on asset prices,” Fed Chairman Alan Greenspan told his colleagues during the Sept. 17 conference call.

Mr. Greenspan recommended a half-point cut in the federal funds rate and proposed that the announcement of the rate reduction occur at 8:30 a.m., one hour before the stock exchange was to reopen, as a way of trying to boost investor confidence.

The other members of the Federal Open Market Committee, the group of Fed board members and regional bank vice presidents who set interest rates, endorsed the action unanimously.

“It is the right thing for the Federal Reserve to show the flag at this awesome, awful moment in our country’s history,” said William McDonough, at the time president of the New York Federal Reserve Bank.

The Fed rate cut occurred as part of a global effort by central banks in a number of countries to cut interest rates. However, the action did not prevent a huge stock sell-off that Monday with the Dow Jones Industrial Average falling by 685 points, its biggest one-day point loss on record. Stocks continued to fall for the rest of that week before staging a modest rebound.

Mr. Greenspan and his colleagues said it was impossible to predict the long-term impact of the terrorist attacks on a U.S. economy that already had been battered by the bursting of the dot-com stock market bubble the previous year.

“Whether it’s sufficiently negative to create a significant downside potential for the economy, we don’t know,” Mr. Greenspan told his colleagues in a Sept. 13 emergency call two days after the attacks.

In the transcripts, Mr. Greenspan said he had been heartened by the support other nations had voiced for the United States in the days following the attacks, saying support in Germany was “really quite remarkable” based on his listening to shortwave broadcasts late at night in English from a German broadcast service.

In their telephone discussions, some Fed officials said the economy had appeared to be stabilizing before the attacks and suggested that if necessary the Fed could reverse course and raise rates if the economy began growing at too rapid a pace.

No Fed officials raised the possibility in the telephone discussions immediately after the terrorist attacks that the country could already be in a recession. The National Bureau of Economic Research later put the official start of the downturn as March 2001 and said the recession ended in November 2001.

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