- The Washington Times - Thursday, July 19, 2001

Federal Reserve Board Chairman Alan Greenspan and his colleagues, whose actions determine the direction of short-term interest rates, have acted responsibly and vigorously this year by lowering those rates. The fed funds rate now stands at 3.75 percent, which is three-quarters of a point above the level where it was the last time the economy had slowed so precipitously. Thus, there is still significant room for more easing. The Fed has already signaled the likelihood that it would continue reducing short-term rates, and in the light of recent adverse economic developments, it should do so sooner rather than later.

Indeed, during Mr. Greenspan's semiannual testimony about the economy and monetary policy before the House Financial Services Committee on Wednesday, he acknowledged that "the risks would seem to remain mostly tilted toward weakness in the economy" rather than toward an acceleration of inflation. Given the dreary economic news the Fed had reported only the day before, the economy appears even weaker than Mr. Greenspan seemed willing to acknowledge.

The Fed reported on Tuesday that industrial production had sharply declined by 0.7 percent in June. It was the ninth consecutive month industrial output had fallen. That hasn't happened since the period from March 1982 to December 1982, when the economy was mired in its worse postwar recession. The Fed also reported that the capacity-utilization rate was 77 percent, its lowest level since August 1983.

To be sure, nobody is suggesting the economy at this point is anywhere near the bad shape it was in at the trough of the 1981-82 recession, when the capacity-utilization rate bottomed out at 71 percent following several quarters of negative growth. On the other hand, neither can anybody assert with certainty that the United States has not yet entered a recession. Indeed, last month the National Bureau of Economic Research, which is the official arbiter for when U.S. recessions begin and end, issued a public memo declaring that "data normally considered by the committee indicate the possibility that a recession began recently."

The Commerce Department will be issuing its advance estimate of second quarter economic activity on July 27. Most analysts believe it will reflect a growth rate of near zero, if not negative, for the April-June period, when nonfarm payrolls declined by 271,000 jobs. The last time payrolls fell by that much was during the 1990-91 recession. Meanwhile, new jobless claims are at their highest level in nine years. Moreover, the rapidly deteriorating economies in Europe, Japan and Latin America jeopardize U.S. exports and threaten a contagion effect that could reverberate throughout the global economy. With demand in danger of falling significantly amid pervasive under-utilized capacity, inflationary pressures are quite subdued and are likely to remain so.

The Fed will not formally meet again until Aug. 21. But the U.S. and world economies cannot wait that long. Accordingly, the Fed would be wise to reduce short-term interest rates by at least another half-point at the earliest moment.



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