NEW YORK (CNNfn) - Economists believe the Federal Reserve could lower interest rates when U.S. stock markets reopen next week in an effort to prevent the economy from falling into recession following terrorist attacks on New York and Washington.|
"I suspect the Fed may be waiting for the day when the markets reopen to deliver an easing move, maybe 50 basis points (one-half percentage point), to help calm things down," Anthony Karydakis, senior financial economist at Banc One Capital Markets, told Reuters.
The two major U.S. stock markets, the New York Stock Exchange and the Nasdaq, were closed Thursday, the third consecutive day since the attacks. Both will resume trading Monday.
The Fed has cut its target for short-term interest rates seven times so far this year, from 6.5 percent to 3.5 percent. The moves were an effort to stimulate an economy which has been sagging under the weight of the burst technology bubble, rising energy prices and a volatile stock market.
On Tuesday, terrorist attacks destroyed the landmark twin towers of New York's World Trade Center and damaged the Pentagon near Washington, D.C., killing and injuring untold thousands and causing billions of dollars in damage.
Many economists have suggested the Fed could act to avoid a full-blown recession following heightened consumer caution, massive insurance claims, the cost of greater security measures and fears of lost corporate profits.
"The rate cut could be temporary, but in these times of crisis, I think it's not inappropriate," said Sung Won Sohn, chief economist with Wells Fargo & Co. "Sooner or later we'll see [rates] come down a lot lower than we thought we would," possibly even approaching 2 percent.
Click here for more on the Fed and rates
Consumer spending accounts for two-thirds of the U.S. economy and has almost single-handedly kept recession at bay. A report last Friday by the Labor Department that the unemployment rate jumped to 4.9 percent in August, worse than economists expected, solidified expectations that the Fed was going to cut rates again to boost consumer sentiment. Tuesday's attack apparently sealed the deal.
"There was probably a cut coming in any event, said Robert Goodman, chief economist with Putnam Investments. "In order to forestall any negative reaction on Wall Street, they may give us what they were going to give us earlier. It would be more psychological than anything else."
The Fed has worked hard in the days following the attacks to soothe fears and keep money flowing through the U.S. and global economies. On Thursday, it swapped $50 billion in cash with the European Central Bank to meet the ECB's cash needs. On Wednesday, the Fed added an unusually large $38.25 billion in temporary reserves to the U.S. banking system and said it would add more reserves as necessary.
The U.S. bond market resumed regular trading Thursday, and bond prices rose, as investors bet another interest-rate cut was likely and worried that stock prices could fall when trading resumes.
The Chicago Board of Trade and Chicago Mercantile Exchange, the nation's two largest futures markets, said interest rate, foreign exchange and commodity products resumed trading Thursday after closing for two consecutive days in the wake of the terrorist attacks.