All eyes turn to Fed rate decision
By Martin Crutsinger
Associated Press
WASHINGTON — Dazed investors are hoping that Federal Reserve Chairman Alan Greenspan, who once famously worried about "irrational exuberance,'' is now concerned about too much pessimism.
Wall Street's fervent wish is that the central bank will provide a sizable 0.75 percentage point cut in interest rates when Fed policy-makers meet today as a way of breathing new life into a moribund economy and halting the steep slide in stock prices.
Such a reduction would be the biggest Fed move in a key interest rate in nearly a decade, since it cut its largely symbolic discount rate by a full percentage point on Dec. 20, 1991, as it tried to spur growth after the 1990-91 recession.
Many economists believe that strong interest rate relief is needed now, given the huge sell-off that has been occuring on Wall Street, where the Dow Jones industrial average last week suffered its biggest weekly drop in 11 years.
"The perception is that the sky is falling because of the stock market,'' said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "The stock market is the canary in the coal mine ... If the canary dies, we will have a serious and deep recession.''
Wall Street staged a slight rebound yesterday in anticipation of a big Fed rate cut, with the Dow Jones industrial average rising 135.70 points to close at 9,959.11 as investors took bets on selected stocks.
In the view of Sohn and other economists, the Fed will act boldly to send a strong signal that it is ready to do whatever is necessary to get the faltering U.S. economy back on track.
The concern is that the weakness in financial markets could trigger a chain reaction in which consumers, who account for two-thirds of total economic activity, will become so fearful that they stop spending and end up spelling an end to the record 10-year long economic expansion.
But other economists are not so certain that Greenspan and company will ride to Wall Street's rescue, in part because they believe the Fed does not want to give the perception that it is coming to the aid of wealthy investors who have taken a hit to their portfolios.
These economists note that Greenspan began warning back in December 1996 about the threats posed if investors became overcome by "irrational exuberance'' rather than focusing on the underlying fundamentals that determine a company's value.
Diane Swonk, chief economist at Bank One in Chicago, said she was looking for just a half-point cut in rates this week. She said the real economy is already showing signs of rebound even as Wall Street continues to suffer fall-out from the bursting of a speculative bubble in high-tech stocks.
"If the Fed did cut rates by three-fourths of a point, it would look like they are pandering to Wall Street and that is not a message they want to send,'' she said.
The Fed has already cut its target for the federal funds rate, the interest that banks charge each other on overnight loans, by a full percentage point to 5.5 percent, in two half-point moves on Jan. 3 and Jan. 31.
The Fed's January rate cuts were taken against the backdrop of an economy that appeared to have hit a brick wall at the end of last year when unusually cold weather and rising energy bills sent consumer spending into a tailspin.
However, in the first two months of this year, consumer spending has rebounded, easing economists' fears of a recession.
Some analysts said that the Fed may still cut rates by three-fourths of a point this week, in light of the stock market's troubles and a benign inflation outlook.
"The risk of inflation looks pretty small right now while there is still a risk of recession,'' said David Wyss, chief economist at Standard & Poor's. "The manufacturing sector is in serious trouble, Japan is falling apart again and Europe is slowing down.''
Because of those threats, many analysts believe this week's rate cut, whatever its size, will be followed by further reductions at coming Fed meetings on May 15 and June 27, as the central bank takes out an insurance policy against a downturn.
The Bush administration, which has been criticized by Democrats for talking down the economy in an effort to boost chances for its $1.6 trillion tax cut, was more careful in its choice of words on Monday.
President Bush, meeting with Japanese Prime Minister Yoshio Mori, said he was confident the U.S. economy "can beat expectations'' this year while Treasury Secretary Paul O'Neill refused to comment directly on recent market developments, saying, "The markets go up and the markets go down.''
