- The Washington Times - Wednesday, October 3, 2001

The Federal Reserve yesterday slashed interest rates to their lowest levels since John F. Kennedy was president, saying "heightened uncertainty" from the Sept. 11 terrorist attacks is depressing the already weak economy.
Banks quickly followed the Fed's half percentage point cut in two benchmark lending rates with identical cuts in the prime rate, bringing it to 5.5 percent. That ensures businesses and consumers with credit cards, home equity loans and other debt tied to the prime will soon benefit from the historically low rates.
Despite the near halving of short-term borrowing rates in nine Fed actions since the beginning of the year, the economy has shown few signs of life. It is widely believed to have fallen into recession since the terrorist attacks devastated air travel, prompted mass layoffs and threw business and consumer spending plans into disarray.
Even officials in the housing sector, which got a major boost from the Fed's rate cuts earlier this year, now predict a retrenchment in home sales in coming months based on a fall-off in activity seen since the attacks.
Economist Joel Naroff of Naroff Economic Advisers said the Fed pinpointed the problem when it cited the extreme uncertainty that is holding back spending by businesses and consumers.
"People are uncertain about the future, uncertain about additional terrorist activities, uncertain about what course the military action will take," he said. "While that may not lead to a collapse in spending, it sure does point to continued restrained activity."
The Fed's dramatic rate cuts totaling a full percentage point in the last month are aimed as much at bolstering confidence as they are at boosting borrowing, Mr. Naroff said. Wall Street analysts predicted a sell-off in the stock market yesterday if the Fed hadn't cut rates. By doing what the markets expected, the Fed sparked a modest rally, sending the Dow Jones Industrial Average up by 114 points.
"The rate cut impact may be more symbolic than real," Mr. Naroff said, as long as people and businesses are postponing spending out of fear and uncertainty. He added that the $35 billion of tax rebates that arrived in taxpayers' mailboxes this summer have done little to promote spending for the same reason.
Businesses and consumers are using the rate cuts and tax cuts not to increase spending but to consolidate and refinance their debt and build up their cash reserves. And while that may limit bankruptcies and layoffs and put them in a healthier position for growth later on, it does nothing to keep the economy out of recession right now.
"People are suffering from an unwillingness to spend, not an inability to spend," Mr. Naroff said.
In the end, the government's ramped up spending on reconstruction and rescue assistance after the attacks and its war on terrorism may do more to bolster the economy than further rate and tax cuts, he said.
Meanwhile, the Fed's aggressive actions set the stage for explosive growth when the economy does recover, probably next year, analysts said.
Diane Swonk, chief economist at Bank One Corp. said the Fed's actions have left the interest rate it charges on discount loans to banks at an unbelievably low 2 percent, while the central bank's target rate on overnight loans between banks is about the same as the inflation rate at 2.5 percent.
"Basically we're talking free money" for banks and the highest quality consumer and business borrowers, she said. "That's highly stimulative. It might not save us from recession, but it will lead us into a boom later on."
The chairman of the White House Council of Economic Advisers, Glenn Hubbard, yesterday said the terrorist attacks probably pushed the economy into recession last month.
"The loss of life, the damage to the financial sector, and the interruption of commercial aviation temporarily restricted the economy's ability to supply goods and services in the short run," he told the Senate Budget Committee.
"There is every reason to believe a recovery would commence in 2002," he said, "with prudent decisions by Congress and the administration."
President Bush said yesterday that the goal of a second stimulus package will be to help the economy in the short run while avoiding any spike in long-term interest rates caused by dissipating government surpluses.
Fed Chairman Alan Greenspan has warned that any large stimulus package that eliminates the surpluses could raise mortgage rates and shut off activity in the housing market.
With massive amounts of stimulus in the pipeline and an economy already flooded with cheap money, Richard Yamarone, economist with Argus Research Corp., said the Fed runs the risk of "pushing on a string" by cutting rates further.
"There is little, if anything, that additional rate cuts will do to right the economy at least until late 2002" because rate cuts usually take from six to 18 months to affect the economy, he said.
"Truth be told, any Fed rate cut from here on out is all PR," he said.

LOAD COMMENTS ()

 

Click to Read More

Click to Hide