Analysts say quarter-point cut part of wait-and-see strategy
| • | Hawai'i banks match Fed interest rate cut |
USA Today
With the smallest interest rate cut since the Federal Reserve began its rate-trimming cycle six months ago, Chairman Alan Greenspan and the other Fed policy-makers now appear willing to let the cuts already in place do their work.
Bloomberg News Service
"They are passing the baton of policy action to tax cuts," says Neal Soss, chief economist at Credit Suisse First Boston.
Clerks in the a trading pit at the Chicago Mercantile Exchange reacted as the Federal Open Market Committee announced a quarter-point reduction of the short-term interest rate yesterday.
The Federal Reserve reduced rates by a cautious quarter-point yesterday, signaling that policy-makers may have begun to wind down their aggressive campaign to revive the slumping economy. The rate cut was the Fed's sixth this year but its first quarter-point move after five half-point cuts since it began its urgent rate-slashing in January.
Though there is little sign that the Fed's traditionally slow-acting medicine has begun to work, Fed officials noted that they have cut rates significantly so far this year. And although they did not say so, they may also be hanging back to see whether tax rebates that go to consumers beginning next month give the economy a jolt.
Next month, American consumers will begin receiving their portion of the recently passed $40 billion tax rebate. Married couples will receive up to $600, and single earners without children will get up to $300.
If Americans take their refunds to the malls, that could be a boon for the economy. If they stash the tax windfall in the bank, in anticipation of tougher times ahead, the Fed may need to cut rates again. Traditionally, consumers tend to spend about a third of their rebates and save the rest.
Even without tax rebates in the offing, Fed policy-makers were getting ready to adopt a slower approach. Interest rate cuts usually take six months to a year to show up in the economy. The Fed first began cutting short-term rates in January, and most analysts expect that the effects should begin to show up soon. But so far, there are few signs of a rebound.
American factories have been mired in recession since late last year. The high-tech part of the economy may still have inventories to work off and could be the last to pull out of the downturn. Company executives are paring back their work forces and putting off capital expenditures. All of those must turn around before the economy can get back on track.
Greenspan and the Federal Open Market Committee have cut rates aggressively this year to prevent the broader economy from slipping into recession. During the last recession in 1990-91, the Fed took more than a year to lower rates by 2.75 points. This time, they covered that much ground in six months.
The rate-cutting campaign was so aggressive, hawks at the Fed fretted about sparking inflation. The benchmark federal funds rate is now the lowest it has been since early 1994.
Inflation, of course, is the dragon that Fed policy-makers feel they have been hired to slay. The slightest flicker of price instability sets Fed members' teeth on edge. But so far, inflation has been benign. Technological advances have allowed American workers to produce more, and that has kept a lid on prices.
But whether those efficiencies can work in a slower economy is unproven. Already, some Fed policy-makers have been expressing concern that the Fed's cuts have been overdone and that the rate of inflation will rise when growth picks up later this year or in 2002.
The quarter-point move yesterday may have been a compromise. It sent a message to the markets that the Fed had not finished the job but also signaled that it had not abandoned its vigilant watch over any nascent inflation.
Now, the only thing to do is wait and hope that Greenspan has called it right.
"If the economy doesn't begin to respond to Greenspan's rate cuts soon, I'll be more worried," says Oscar Gonzalez, economist at John Hancock Financial Services.
And while Fed members may be anticipating a recovery as soon as this year, analysts are less sure. They are bracing for a very slow rebound because the standard quick fixes to the economy are out of play.
Usually, for example, housing and auto sales provide a quick shot in the arm for an ailing economy. Typically, such interest-rate-sensitive sectors leap to life when rates go down.
This time around, though, the housing and auto markets have been pretty steady and weren't depressed when the Fed began slashing rates.
