Posted on: Wednesday, March 21, 2001
Rate cut suggests more bearish outlook
The tea leaves scattered in the wake of yesterday's half-point interest rate cut suggest the Federal Reserve is worried that the current economic weakness may last longer than earlier thought, and possibly that there is division among its members as to just how bad things now are.
This is the third half-point cut by the Fed this quarter, and it hinted that another wouldn't be far behind. What's important is that the Fed seems prepared to lower interest rates in a timely fashion, rather than let the economy tumble into deep recession.
Indeed, the economy very likely already is in a state of negative growth. The hope is that monetary action, by allowing firms to turn around their disappointing profit pictures with easier borrowing, can bounce it back into that wonderful growth cycle that lasted the best part of a decade.
One hint of the Fed's inability to seize complete control of the situation is in its statement that the necessary reduction in inventories is "well under way." It would be up to a Japanese recovery to accelerate such a movement of goods, and that's looking most unlikely at the moment.
The stock market was disappointed that the Fed didn't drop its rates by an unprecedented three-quarters of a point. But the Fed's business is steadying the economy, not underwriting investors' moral hazard.
The rate cut may provide some opportunities for consumers to reduce their homeowner equity loans and credit card debt. Mortgage rates probably have already dropped, in anticipation of yesterday's rate cut, about as far as they will.
The scariest aspect of the state of the economy is for inexperienced stockholders, many of whom have never seen the ugly side of the business cycle. The rules for investing have not changed: Don't invest money you need for paying the rent; buy quality stocks and hold on to them; don't let market news spook you into selling them.
Experienced investors aren't thinking about selling, but about whether it's time to buy.
