Fighting to extend the 10-year record US expansion, the Fed has lowered the overnight rate by 3 1/2 percentage points this year, beginning with a surprise between-meeting cut on Jan. 3.
That's the most aggressive series of rate reductions in Fed Chairman Alan Greenspan's 14-year tenure.
In the weeks before the Sept. 11 attacks, Greenspan and other Fed officials said they were seeing "tentative" signs the economy's slowdown was bottoming out. Businesses had worked off excess stockpiles of inventories and the National Association for Purchasing Management's factory new orders index had turned positive in August for the first time in a year.
Still, recovery was far from certain. As the Fed had pushed the overnight rate lower, the yield on two-year Treasury notes declined by about 2 1/4 percentage points. Even so, the yield on 10-year Treasury notes, to which many business loans are tied, have fallen only a half percentage point.
With long-term rates little changed, businesses haven't been encouraged to borrow for expansion.
"The problem for corporations is excess capacity and the paucity of demand," said former Treasury Secretary Robert Rubin, now chairman of Citigroup Inc.'s executive committee.
The likelihood is that the aftermath of the terrorist attacks will postpone a recovery. The economy is expected to have contracted at a 0.5 percent rate in the third quarter and to shrink by a full percentage point in the fourth, the Bloomberg News survey showed.
Retail stores were empty as Americans stayed home Sept. 11 and afterward to watch events on television and to mourn.
Airlines, grounded for two days, lost billions of dollars and have reduced their flight schedules by about 20 percent.
Ford Motor Co, Goodyear Tire & Rubber and PPG Industries Inc are among automobile and parts manufacturers that shut down production lines when imported parts, held up by security inspections at the border, failed to arrive on time.
"The economic activity that was lost is lost forever," said Mark Zandi, chief economist at Economy.com in West Chester, Pennsylvania.
Analysts see the economy rebounding by early next year.
Rebuilding New York and the Pentagon will boost growth. The Bush administration is crafting a spending and tax-cut package to put more money into the economy. And eventually the Fed's rate reductions will boost spending and investment -- perhaps too much, analysts said.
"The cumulative amount of stimulus the Fed has put in the pipeline is virtually unprecedented," said Brown Brothers' Rhame.
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