US Fed likely to reduce lending rate

Federal Reserve policy makers are likely to lower the overnight bank lending rate to 2.5 percent today, the lowest since John F. Kennedy was president, to help pull the US economy out of what analysts see as an almost-certain recession.

Central bankers already have reduced the overnight rate eight times this year to a seven-year low of 3 percent and will probably cut it again by half a percentage point, according to the median forecast of 35 economists surveyed by Bloomberg News.

"The Fed needs to be the umbrella in the hailstorm now," said Diane Swonk, chief economist at Bank One Corp in Chicago.

The economy, already weak, probably shrank in the just-ended third quarter and is likely to do so in the fourth after the Sept. 11 terrorist attacks depressed business and consumer spending, a separate survey of 30 analysts by Bloomberg News showed. Two quarters of contraction is a widely accepted definition of recession.

Companies including EMC Corp, Textron Inc, and Teradyne Inc have announced they will be firing workers. AMR Corp's American Airlines, UAL Corp's United Airlines, Delta Air Lines, US Air Corp and Northwest Airlines, have said they will eliminate as many as 92,500 jobs.

The Fed's target overnight rate, also known as the federal funds rate, is the price banks charge each other for overnight loans. It serves as a benchmark with commercial bank prime rates and other borrowing costs tied to its movements.

The monthly average overnight rate hasn't been as low as 2.5 percent since May 1962, before the Fed began using it as the primary means of influencing monetary policy. Investors expect the overnight rate to fall to 2.5 percent tomorrow and to 2.25 percent by the beginning of next year, judging from trading in federal funds futures contracts.

Normally, the Fed lowers the overnight rate to push down the cost of consumer and business loans, stimulating purchases and boosting growth. Given the uncertainties now about the economy following the attacks, analysts said the Fed's expected action this week would be as much about psychology as borrowing costs.

"Rate cuts work with a lag, so these would be geared toward stimulating the economy very far in the future," said Lara Rhame, an economist at Brown Brothers Harriman in New York. "What's more important is the near-term psychological impact on anxious investors, companies, and consumers."

Consumer confidence plummeted in September to the lowest in almost six years, a survey by the Conference Board showed, or the lowest in almost eight years, according to a University of Michigan survey.

Analysts said confidence was already falling before the attacks on the World Trade Center and the Pentagon. A preliminary University of Michigan sentiment index, based on surveys before Sept. 11, had dropped to 83.6 from 91.5 in August. The final survey, released Friday and covering the entire month, showed a decline in the index to 81.

The economy's growth rate had been dropping along with confidence. After expanding by 4.1 percent in each of the past two years, the economy grew at a 1.3 percent annual rate in the first quarter and a 0.3 percent pace in the second -- the weakest three months since the first quarter of 1993.

Consumer spending, which accounts for two-thirds of gross domestic product, has kept the economy afloat as business investment has contracted for three straight quarters.