---- by JUSTIN COLE ----
WASHINGTON (AFX) - US consumer confidence is likely to fall significantly in the aftermath of the terrorist attacks against the World Trade Center and the Pentagon, tipping the world's largest economy into a recession and causing a further drag on slowing global growth, economists said. Economists expect the FOMC to trim its key federal funds rate before its next scheduled policy meeting on Oct 2, in a bid to calm the country's financial markets following cash interventions by the European Central Bank and the Bank of Japan earlier today. "We're operating in a sea of uncertainty, uncertainty is the enemy of decision making. You could see some hold-up in peoples' spending plans until we get a clearer picture of what is going to emerge," said Robert Dederick, an economic consultant with Northern Trust Co in Chicago.
"We've been counting on the consumer. The fears are to the downside," Dederick said. "Yesterday's horrific terrorist attacks on the United States will inevitably have a deeply negative effect on the near-term pace of global economic activity," said Sherry Cooper, a global economic strategist with the Bank of Montreal Group of Companies, in a note to clients.
Economists are now expecting the economy, which has weathered a dramatic slowdown during the last 12-14 months, to fall into recession as consumers put their spending plans on hold in a period of economic and commercial uncertainty.
"The US economy will likely end up in recession, and the global economy perform worse than in the early 1990s slowdown," Lehman Brothers global chief economist John Llewellyn told clients in a briefing note.
Economists are particularly concerned about the impact yesterday's terrorist attacks will have on consumer confidence and sentiment because consumer spending, which accounts for roughly two-thirds of GDP growth, has been one of the few areas of the economy which has held up well.
The full impact on consumer spending will become clearer through the remainder of September and into the fourth quarter -- a period in which economists had been forecasting that the economy would return to growth.
"The mere disruption of New York, (which is closed to access south of 14th Street today) Washington and all American airports will contribute to this recession. Global trade will slow further, exacerbating the multinational slowdown that is already in train. This will mean global recession," Cooper said. Before yesterday's terrorist attacks, some economists had concluded that the Fed had completed its easing cycle -- after seven straight rate cuts since Jan 3 -- but other observers were still expecting the Fed to trim the fed funds rate by a further 25 basis points before year-end.
As a result of yesterday's devastation, economists now expect the FOMC to announce an inter-meeting reduction in the fed funds rate of between 25 and 50 basis points.
The FOMC has cut the fed funds to 3.5 pct at its last meeting on Aug 21.
Asked how the Fed is likely to react, Dederick replied: "This could well rush them...they might well move more promptly now. Their primary aim will be working to ensure there will be enough liquidity." A Fed spokesman said today that the central bank's discount window, which provides credit to the country's banks, remains open today and that the window functioned smoothly yesterday despite elevated demand. "Further monetary policy easing now looks increasingly likely, though not necessarily immediately," said Llewellyn.
Despite expectations of an expected drop in consumer spending, some economists noted that the economy bounced back from the 1991 Gulf War, and Llewellyn added that "government expenditure will doubtless increase, as further fiscal easing is now likely to be pushed through, but it will take time to turn into actual spending."