As a senior economist and central bank strategist, I have analyzed the transition between the September 17 and October 2, 2001, FOMC statements. This period is critical as it represents the immediate monetary response to the 9/11 attacks and the preceding dot-com bubble burst.
The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 2-1/2 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 2 percent. ~~The Federal Reserve will continue to supply unusually large volumes of liquidity to the financial markets, as needed, until more normal market functioning is restored. As a consequence, the FOMC recognizes that the actual federal funds rate may be below its target on occasion in these unusual circumstances.~~
The terrorist attacks have significantly heightened uncertainty in an economy that was already weak. Business and household spending as a consequence are being further damped. ~~Even before the tragic events of last week, employment, production, and business spending remained weak, and last week's events have the potential to damp spending further.~~ Nonetheless, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate.
The Committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future. ~~For the foreseeable future, the Committee continues to believe that~~
In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, Richmond, Atlanta, St. Louis, Kansas City ~~Chicago, Minneapolis, Dallas,~~ and San Francisco.
| Removed | Added | Significance |
|---|---|---|
| Liquidity provision & target overshoot language | (None) | Suggests that the immediate "panic" phase of market dysfunction (liquidity freeze) had stabilized enough to remove the explicit warning about rate volatility. |
| "Potential to damp spending" | "Are being further damped" | Shift from probabilistic risk (potential) to observed reality (are being). A stark admission of economic deterioration. |
| Specific list of 5 Fed Banks | Expanded list of 8 Fed Banks | Indicates a broader, more systemic request for discount window access across more districts. |
| "For the foreseeable future" (at start of sentence) | "In the foreseeable future" (at end of sentence) | Minor syntactical shift; maintains the same bias toward economic weakness. |
Inflation
There is no explicit mention of inflation figures. However, the continued reference to "price stability" as a long-run goal, paired with aggressive rate cuts, indicates that the Committee viewed inflation as a non-threat (or a secondary concern) compared to the risk of a deep recession.
Labor Markets & Growth
The shift here is profound. In September, the Fed noted that spending "had the potential" to be damped. By October, the language shifted to the present tense: spending "are being further damped." This indicates that the Fed is now observing the negative impact of the attacks in real-time data, moving from a posture of "precaution" to "reaction."
Forward Guidance
The guidance remains heavily skewed toward easing. By lowering the target again by 50bps and maintaining the language that risks are "weighted mainly toward conditions that may generate economic weakness," the Fed is signaling that it will remain accommodative until the "unusual forces" abate.
The Committee shifted decidedly Dovish.
While the September statement was an emergency response to a shock, the October statement confirms that the shock has translated into a tangible economic contraction. The transition from "potential to damp" to "are being further damped" is a critical linguistic pivot that justifies the second consecutive 50bps cut. Furthermore, the expansion of the list of Federal Reserve Banks requesting discount rate actions suggests a widening need for emergency credit across the banking system. The Fed is no longer just guarding against a downturn; it is actively fighting an unfolding one.