- The Washington Times - Wednesday, December 12, 2001

The Federal Reserve yesterday cut interest rates by another quarter percentage point to the lowest levels in decades, saying that the economy remains soft despite "preliminary" signs that consumer demand is holding up in the face of rising unemployment.
Banks quickly followed the Fed's 11th cut this year in two key bank lending rates by reducing the prime rate to 4.75 percent from 5 percent, the lowest level since 1972. That ensures businesses and consumers with loans tied to the prime including many credit cards, home equity and car loans reap the benefits.
Some Fed-watchers said the central bank's smaller rate cut, after aggressively pushing rates down by twice as much in earlier moves, is a sign that its yearlong rate-cutting campaign one of the most aggressive in history is nearing an end.
But others said the Fed is "saving its ammunition" because interest rates have dropped so low under its engineering, with the two key bank lending rates the Fed controls at 1.5 percent and 1.75 percent, well below the 2.5 percent inflation rate and not that far above zero.
These analysts say the central bank also is seeking to strike a delicate balance in nurturing an ailing economy in its ninth month of recession even as many economists predict a recovery within weeks based on preliminary signs that consumer demand didn't fall that much in the months after the September 11 terrorist attacks.
The central bank also is keeping a wary eye on Congress, where a $100 billion economic-stimulus bill has stalled and could be derailed if negotiations on a compromise fail this week. Forecasts for a quick recovery which have sparked a major rally on Wall Street in recent weeks hinge partly on another infusion of tax cuts and spending.
The Fed's statement after a daylong meeting of its rate-setting committee suggested it is holding more rate cuts in reserve in case the economy takes another turn for the worse, which some analysts say could happen if Congress fails to agree to a compromise plan and jolts the financial markets.
"With no definitive government support, the Fed figured … we're all the help the economy has," said Richard Yamarone, economist with Argus Research Corp, calling the budgetary impasse "mind-boggling given the recession-driving consequences of September 11."
Federal Reserve Chairman Alan Greenspan also hopes to support a recovery by keeping the stock rally going which he accomplished by acknowledging in the statement the tentative evidence behind Wall Street's conviction that a recovery is just around the corner, said Mark Vitner, economist with Wachovia, formerly First Union. Stocks rose modestly after the Fed's announcement, although the Dow Jones Industrial Average closed down 33 points.
At the same time, the Fed sought to keep recovery from being stifled by a rise in long-term interest rates as markets anticipate a quick recovery. It did this by "stressing the continued fragility of the economy" and the prospect for further declines in inflation next year, Mr. Vitner said. The rates on Treasury bonds and 30-year mortgages hit 30-year lows early last month, but have risen since then as bond investors looked forward to a recovery next year.
Douglas Lee, president of Economics from Washington, said he expects Congress to come to agreement this week on a stimulus plan after weeks of delay and political maneuvering, and he remains optimistic the economy will recover robustly next year as a result of the "massive fiscal stimulus" and the Fed's "easy money" policies.
"Republicans have agreed to extend unemployment insurance benefits, which is a major concession and puts the ball in Democrats' court," he said.

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