Sunday, February 4, 2001
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Posted on: Sunday, February 4, 2001

Federal rate cuts intended to reignite economy

Associated Press

WASHINGTON - The Federal Reserve threw a one-two punch with two half-point cuts in interest rates last month as it pursued its fight to keep the nation from falling into a recession. But private economists believe it will take more rate reductions in the coming months to score a knockout.

Fed Chairman Alan Greenspan and his colleagues cut a key interest rate again last week, following up on a cut ordered just four weeks earlier, Jan. 3. The two half-point cuts marked the first time in Greenspan’s 13-year tenure that the central bank has reduced the funds rate by a full percentage point in a single month.

The Fed’s action came against the backdrop of troubling economic news. Consumer confidence in the economy fell in January to its lowest point in four years. Manufacturers are struggling, cutting back production and laying off workers as they cope with an economy that has slowed dramatically since the first half of last year.

"The Fed will do whatever it takes to prevent a recession and reignite growth," said Merrill Lynch economist Bruce Steinberg.

The Fed’s latest action means a further drop in borrowing costs for millions of Americans as commercial banks immediately announced reductions in their prime lending rate by one-half point to 8.5 percent.

For Hawaii, it also brought hope for continued growth in the state’s economy by boosting flagging consumer confidence on the Mainland, which has accounted for much of a recent boom in the state’s key tourism and housing industries.

Steinberg and other analysts predicted Fed policy-makers will cut rates again by a quarter point at each of its next three meetings in March, May and June.

The Fed - in the part of its statement that reflects possible future action - maintained its stance that its chief concern is the threat of the economy stalling and falling into a recession.

"The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," the Fed said.

Mark Vitner, an economist with First Union, said the Fed’s choice of words imply that the central bank "is willing to go to great lengths to revive the economy but also suggests that the Fed views January’s two half-point interest rate reductions as an extraordinary event."

Greenspan had told Congress earlier last month that growth in the current quarter could be "very close to zero." He said whether the economy averts a full-blown recession would determined by how much worried consumers cut back on spending.

Many saw the Fed’s aggressive easing as an effort by Greenspan to avoid the mistakes that brought on the 1990-91 recession, the only downturn in his tenure.

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