Thursday, February 1, 2001
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Posted on: Thursday, February 1, 2001

Fed drops interest rates amid worsening outlook

Advertiser News Services

The Federal Reserve Board moved to perk up the faltering U.S. economy with another interest-rate cut yesterday, reducing the federal funds rate from 6 percent to 5.5 percent. On top of that, it approved another half-point cut in its discount rate, which it charges banks for direct borrowing.

With these moves, a number of commercial banks lowered their prime lending rate, charged to their biggest and best customers, from 9 percent to 8.5 percent.

The prime rate is one benchmark interest rate built into many types of borrowing costs, such as adjustable-rate mortgages and home equity loans. Dropping it will put more spending money into people’s pockets — precisely what the Fed had in mind to combat a possible recession.

But even as the Fed announced the cuts, evidence of the nation’s deepening economic slowdown continued to mount.

The economy grew in the second half of 2000 at the slowest annualized pace in five years and few signs of improvement in the months ahead increase the likelihood central bankers may cut their benchmark overnight bank lending further.

And job losses at companies across the country are continuing, creating concern that growing uncertainty among consumers will cut into spending, which in turn could threaten the nation’s fragile economic health.

As they have been for months now, economists are unsure and divided about where the economy is headed — and whether the Fed’s traditionally slow-acting rate cuts can help anytime soon.

It took about 18 months from the Fed’s first rate increase in June 1999 before the economy finally hit a wall in December 2000, and textbooks teach that completely reversing the slowdown could take roughly as long.

Pessimists doubt that the Fed can do enough, soon enough to reverse the sharply slowing economy before it slides into recession. Optimistic forecasters are predicting a healthy rebound by midyear.

"People underestimated the power of interest rates on the way up; we’re bound to do the same on the way down," said Robert DiClemente, chief U.S. economist for Salomon Smith Barney.

DiClemente notes that the Fed’s rate increases wound up having an enormous impact despite initial doubts that they would slow the New Economy or the seemingly invulnerable high-technology sector.

Still, if a recession should indeed develop, most economists said, it will likely take place in the first half of this year and be over in the second half, although even then economic growth is not expected to be strong. The odds of a longer downturn at the moment are seen as small, although some analysts do not rule it out.

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