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FED Expected to Lower Interest Rates, Providing Economic Boost

By James Toedtman
NEWSDAY -- WASHINGTON

Alan Greenspan more than likely hopes that Joe Butera is a leading economic indicator.

More than 400 miles from the white marble building where the chairman of the Federal Reserve will convene his regular meeting of the Fed’s open market committee Tuesday, Butera sells cars in West Islip, N.Y.

For days, Greenspan and his committee of bankers have been assessing the grim condition of the nation’s staggering economy in the wake of the Sept. 11 terrorist attacks.

The attacks triggered more than 100,000 layoffs and reduced airline flights, canceled conventions and postponed vacations that have left the tourism and entertainment industries reeling. Corporate profits continue to fall, unemployment has jumped a full percentage point in the past nine months, and the stock market has fallen nearly 18 percent since January, even after its 611-point rebound last week.

But in West Islip, Butera said, car sales lately have been “just tremendous.”

Butera is general manager at a Pontiac dealership in West Islip, and sales for most of the summer had been slow and slower -- reflecting the economy. But when General Motors announced a special 0 percent financing promotion last week, “it worked,” Butera said.

Even Hummers, he said. Ordinarily he’ll sell one of the heavy-duty British-made $100,000 utility vehicles a month. He sold four last week.

“Consumer confidence, that’s the big question,” said David Huether, chief economist for the National Association of Manufacturers. “When that goes down, consumer spending goes down,” and it already was falling before Sept. 11. Consumer spending accounts for two-thirds of the national economy, and in the past three weeks, consumers have stopped shopping, except for essential purchases, he said.

Most economists expect Greenspan and the committee to provide some encouragement for consumers by dropping their target interest rates by one-quarter to one-half a percentage point. That would bring effective federal funds interest rates to their lowest point since 1962 -- when the average monthly rate was 2.29 percent in May and 2.71 percent in July.

Tuesday’s rate cut will be the ninth this year, as the Fed continues its intense effort to prolong the 10 years of uninterrupted economic growth. The decision, and the Fed’s accompanying announcement, will be the first indication of Greenspan’s assessment of the economic effect of the terrorist attacks. Just moments before the nation’s stock markets reopened Sept. 17, the Fed announced a half-point cut and at the same time announced that it would ease lending for the nation’s banks. But in the days that followed, Greenspan pleaded with congressional leaders to hold off on a host of proposed stimulus plans until he could better assess the full economic impact of the attack.

What is now called “the Greenspan Moment” on Capitol Hill did indeed slow the congressional race to help ailing industries and jump-start the economy. Congress did approve both $40 billion for rebuilding New York and bolstering the nation’s defenses and $15 billion in loan guarantees and direct aid for the airlines. But it stopped at any further spending or tax cut initiatives.