Before yesterday, central bankers were saying the economy's weakness would persist for a while. "The common view is the revival will be a little later and somewhat slower than people thought three or four months ago," William Poole, president of the Fed Bank of St. Louis, said yesterday in New York.
Economists have been forecasting an eventual rebound. The Blue Chip Economic Indicators consensus forecast released in August showed the economy would probably expand at a 1.7 percent rate in the current third quarter and a 2.8 percent pace in the final three months of the year.
Following the Oct. 19, 1987, stock market crash, the Fed provided cash to banks and securities firms to keep financial markets functioning. "The Fed is the lender of last resort," Fed Governor Edward Gramlich said on Tuesday in Tucson after the attacks. "If credit is needed to make transactions go, the Fed will provide it."
Gramlich said he was making that statement "in the spirit" of a similar statement from Fed Chairman Alan Greenspan in 1987.
That suggests the possibility of a rate cut before the Fed's next meeting Oct. 2, analysts said. The Fed already reduced rates twice this year in surprise moves between scheduled meetings of the policy-setting Open Market Committee.
"Given the events, it would appear that a Fed cut in the very near-term looks more likely," said Marc Chandler, chief currency strategist at HSBC Securities in New York. "The immediate economic implications aren't good."
Over the longer term, the economy may benefit from rebuilding efforts and as consumers slowly regain confidence.
While there may be adverse effects from today's attacks, "what the government does may go in the other direction," said Robert Mundell, professor of economics at Columbia University and 1999 winner of the Nobel Memorial Prize in Economic Science.
"You're going to have a new building, and there may be a step up in military" spending, Mundell said.
Government statistics show that spending rose 0.6 percent in February 1991 and 1.1 percent in the following month after the US and its allies brought a quick end to the Gulf War. The Conference Board's consumer confidence index, which fell to 55.1 in January 1991, surged two months later to 81.1.
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