Tuesday, January 30, 2001
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Posted on: Tuesday, January 30, 2001

Rate cut by Fed expected this week

Associated Press

WASHINGTON — Alan Greenspan’s stark assessment that economic growth is probably "very close to zero" has many analysts convinced that the Federal Reserve will follow its surprise Jan. 3 rate cut with another half-point reduction at this week’s meeting.

The big question, analysts said yesterday, is whether the Fed’s aggressive easing will be enough to avert a full-blown recession.

The central bank’s interest-setting group, the Federal Open Market Committee, convenes behind closed doors today and tomorrow for its first policy discussions of 2001.

In congressional testimony last Thursday in which he supported using part of the growing budget surpluses for tax cuts — giving President Bush’s $1.6 trillion, 10-year tax cut proposal a major boost — Greenspan issued a rather bleak view of current conditions.

"As far as we can judge, we have had a very dramatic slowing down and, indeed we are probably very close to zero at this particular moment," Greenspan said.

In that pessimistic assessment, Greenspan did not rule out a recession, saying that would depend on whether the economy’s "marked decline breaches consumer confidence."

Many analysts saw Greenspan’s remarks to the Senate Budget Committee as an effort to explain the Fed’s sudden one-half point rate reduction Jan. 3, which came between regular meetings.

"The economic numbers that have been coming in are very weak, and I think they are particularly scared by the consumer confidence numbers," said David Wyss, chief economist at Standard & Poor’s Corp. "If people get scared and stop spending, then you have a recession."

Wyss said he believed that the economy will advance at an annual rate of 0.7 percent in the January-March quarter, a growth rate so weak that a severe winter storm or other bad luck could tip the economy into negative territory. A recession is often defined as two consecutive quarters of declines in the gross domestic product.

"Greenspan wanted to tell people, We know things are bad, and we are moving as fast as we can, and you can expect more,’ " Wyss said.

Wyss predicted that the Fed will announce a half-point cut tomorrow, at the end of its two-day meeting, and would cut rates again at the next two meetings, on March 20 and May 15.

"I think Greenspan feels the economy needs both aggressive Fed rate cuts and a retroactive tax cut to guarantee that the major inventory correction that we are in doesn’t become something worse," said David Jones, chief economist at Aubrey G. Lanston & Co.

Although financial markets and many analysts are looking for a half-point cut this week, some economists believe that the Fed may surprise markets with only a quarter-point reduction out of concern that aggressive easing now could set the stage for inflation pressures if the economy rebounds too quickly.

"Inflation is somewhat on the back burner, but I don’t think the problem has gone away," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

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