- The Washington Times - Thursday, April 19, 2001

The Federal Reserve in a surprise move yesterday slashed interest rates by a half percentage point for a fourth time this year to keep the flagging economy from falling into recession.
The unexpected move jolted the financial markets and sparked a major rally on Wall Street. The Dow Jones Industrial Average soared by 399 points to 10,616, its third-largest point gain. The Nasdaq Composite Index vaulted over 2,000 with a gain of 8 percent, or 156 points, to end at 2,079.
The central bank said it is concerned about faltering business investment spending, growing global economic weakness, eroding corporate profits and signs that consumers may start to retrench because of big losses they have suffered in the stock market. The decision was made during an unusual morning conference call of the Feds rate-setting committee.
The Feds fourth move to cut rates in rapid succession this year came as reports showed profound weakness in the economy that could last for some time.
The Index of Leading Economic Indicators, compiled by the Conference Board in New York, declined for a second straight month, signaling that the economy will remain sluggish through the summer.
The Commerce Department reported a dramatic 19 percent fall in the trade deficit to $27 billion in February, reflecting a collapse of consumer and business spending on imports, which dropped by a record $5 billion.
The trade report showed the U.S. slowdown is dragging down world growth and precipitating a worldwide downturn that the Fed fears will feed back into further deterioration of the U.S. economy.
"The Fed realizes that the economys problems are deeper than most people realize," said David A. Levy, director of the Jerome Levy Economic Institute, which estimates that the economy sank into recession early this year.
"The problem areas cited in the Feds statement — capital spending, fears about business conditions, the household sectors wealth losses, and international conditions — are indeed formidable and will over the next few months prove to be much more serious than todays prevailing expectations," he said.
Though the Feds action clearly pleased the stock market, it was timed to demonstrate that the central bank is acting independent of the markets, he said. Few on Wall Street had predicted the move and, unlike earlier this year, the Fed was under little pressure to try to soothe frayed investors nerves by acting before the May 15 meeting of its rate-setting committee.
The Fed slashed two lending rates it sets on money borrowed by banks, prompting major banks to quickly lower their prime lending rate for consumers and businesses to 7.5 percent from 8 percent.
Since half of all credit-card rates are tied to the prime rate, as are many adjustable-rate mortgages, the move ensures consumers soon will be enjoying the lowest rates in more than six years.
The Fed in its statement said it is worried about the fragile state of consumer finances caused by the steep decline of the stock market in the last year. Most major stock indexes are down by at least 20 percent, and the Nasdaq last month had lost two-thirds of its value.
The Feds fear that the nasty turn in the stock market will take a toll on consumer spending is well-founded, economists say. Consumers spent a portion of their stock gains when the market was booming in the late 1990s. That helped to boost economic growth by 25 percent on average to 4 percent a year.
Consumers in previous years also counted on double-digit gains in the stock market to augment their savings. The booming market enabled many consumers to stop saving and still get wealthier each year.
Now, they can no longer count on the market to boost either spending or savings. Economists say that if consumers start to counter their stock losses by cutting back spending and putting more into savings, the economy could fall into recession.
Richard Yamarone, economist with Argus Research Co. in New York, said the biggest threat to spending is not the stock market, but a steady erosion of jobs since the fall.
"Consumers will spend in light of torpid portfolio growth, but nobody spends without a job," he said.
A huge March job loss of 86,000, reported earlier this month, most likely played a role in the Feds decision to cut rates, he said.
Mr. Yamarone credited Fed Chairman Alan Greenspan for making yesterdays move in a way that boosted the markets without conveying the notion that investors can count on the Fed to prop them up in the future.
"The Fed chairman got a real bang for his buck," he said.
Martin Regalia, chief economist with the U.S. Chamber of Commerce, said the rate cut was prompted by worries about the fall-off of business investment since the fall — a key source of growth throughout the 1990s.
Consumer spending on houses and items, by comparison, has held up pretty well, he said.

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