- The Washington Times - Thursday, April 19, 2001

Even as economists and politicians continue to debate whether the Federal Reserves monetary-policy committee first tightened the money spigots a notch or two too taut last spring, Fed Chairman Alan Greenspan and his colleagues have made it abundantly clear since early January that they have been prepared to respond quickly and aggressively to the economic slowdown. Yesterday, for the fourth time this year, the Fed lowered the federal funds rate, which is the interest rate banks charge one another for overnight loans, by half a percentage point. Not only has each of the incremental changes in 2001 been relatively steep, yesterdays action was also the second time this year that the fed has taken the extraordinary step of changing interest rates between its scheduled meetings, the next set for May 15.

The cumulative two-percentage-point reduction in the fed-funds rate has now lowered the short-term interest rate to 4.50 percent. In effect, during the past three and a half months, the Fed has more than reversed its 11-month campaign that raised the fed-funds rate by 1.75 percentage points from 4.75 percent in the summer of 1999 to 6.50 percent in the spring last year. Moreover, in a signal that future interest-rate reductions would be undertaken if necessary, the statement accompanying the Fed´s action yesterday revealed that policy-makers believe that "the risks are weighted mainly toward conditions that may generate economic weakness [as opposed to inflationary pressures] in the foreseeable future."

Indeed, inflationary pressures have been subdued in recent months. The producer price index, apart from a blip in January, has been relatively tame since June. Most recently, producer prices declined in March. Consumer price inflation, which increased by 0.1 percentage point last month, has decelerated during the past year, falling below 3 percent for the 12-month period ending in March. The index for import prices has declined or remained unchanged for each of the past six months.

Just as inflationary pressures have been subdued, however, so too has been the economy´s growth rate, which increased by an annual rate of only 1 percent during the fourth quarter, the lowest annual growth rate registered in any quarter in more than five years. Meanwhile, the March unemployment rate, a relatively low 4.3 percent, nonetheless reflected an increase of 0.4 of a percentage point since October. In fact, nonfarm payroll employment declined in March, as did retail sales. At the same time, consumer confidence, measured by the University of Michigan consumer sentiment index, has fallen to a seven-year low, while new claims for unemployment benefits reached a five-year high.

In its statement, the Fed indicated concern for a softening of both capital investment and corporate profits. Indeed, private fixed investment, which had been growing at an average annual rate of 10 percent since the beginning of 1996, actually declined during the fourth quarter of 2000, when profits also fell $56 billion. Finally, the Conference Board reported yesterday that its Index of Leading Economic Indicators for March declined for the fifth time in the past six months. All things considered, the Fed´s surprise move yesterday was most welcome, as was its announcement that it is poised to further ease monetary policy in the future.

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