- The Washington Times - Thursday, February 1, 2001

The Federal Reserve Board, citing a rapid erosion of confidence and spending, yesterday slashed interest rates by a half percentage point for a second time in a month to keep the economy from falling into recession.
The central bank said the sudden deterioration of the economy, which at the end of last year weakened to an anemic 1.4 percent annual rate of growth after hitting 8.3 percent a year earlier, demands a "rapid and forceful" response the biggest and fastest rate cuts since Alan Greenspan took over as Fed chairman in 1987.
The Fed described a threatening chain of events in a statement issued after a two-day meeting of its rate-setting committee, starting with a precipitous plunge in consumer and business confidence, "exacerbated by rising energy costs that continue to drain consumer purchasing power and business profit margins."
What has followed is a dramatic weakening of retail sales and business spending on capital equipment that prompted sharp cutbacks in production by the nation's manufacturers, the Fed said.
"The members of the Federal Reserve are clearly worried," said Joel Naroff of Naroff Economic Advisers in Holland, Pa., noting that the Fed's aggressive posture was "cemented in the last 24 hours" with the releases of reports showing an alarming drop in consumer confidence, deep recession in manufacturing and a steep deceleration of growth overall.
The Fed's dramatic action suggests that Mr. Greenspan is haunted by mistakes he made during the 1990-91 recession, analysts say. The Fed was widely criticized for cutting rates too gradually and too slowly to prevent the downturn.
The Fed yesterday made it clear that it would follow up with further rate cuts, if needed, to keep the economy above water, Mr. Naroff said.
Yesterday's cuts in two bank lending rates controlled by the Fed, the federal funds rate and the discount rate, were quickly followed by reductions in the prime lending rate by major banks to 8.5 percent from 9 percent. That ensures consumers and businesses will feel the relief immediately.
A report on economic growth released by the Commerce Department yesterday showed the devastation to manufacturing and business investment as the economy abruptly slowed at the end of last year.
Business spending on software and equipment which grew at double-digit rates for much of the expansion and had been a key ingredient of the economy's strength fell for the first time in a decade. The gross domestic product report showed it dropped at a stunning 4.7 percent annual rate.
Consumer spending, by contrast, rose a modest 2.9 percent. But consumers put much of their money into paying exorbitant home heating bills during the quarter as unusually cold weather drove up consumption of electricity and natural gas by 14.8 percent.
Consumer spending on new cars plummeted by 12.7 percent adding to big increases in inventories at auto dealerships that have prompted production cuts, temporary shutdowns and layoffs by manufacturers.
A burst of government spending on defense bolstered the economy, but if that and the weather-related energy spending were excluded, economists said, growth would have nearly disappeared during the quarter.
"The half-point cut is exactly what was needed to brake our descent into a general downturn," said Jerry Jasinowski, president of the National Association of Manufacturers. He said the serious slump in manufacturing was threatening to spread to the rest of the economy.
While consumer spending has held up despite a fall in confidence, economists said, the report shows an ominous trend that suggests consumers will not contribute much to growth in the future: The savings rate last year plunged into negative territory for the first time since the Great Depression.
Most economists expect consumers to retrench on spending this year so they can build up their savings again and pay off a record load of debt. That is why the rate cuts and proposed tax cuts are important to put spendable cash back into people's pockets, economists say.
Consumers started retrenching just before Christmas, according to the Credit Union National Association, which reports that savings among its members increased by 1.4 percent during December the largest increase since the 1991 recession. With a decline in purchases, borrowing also was the slowest in a decade, it said.
Consumers with adjustable-rate mortgages and home equity loans tied to the prime rate are getting the most immediate relief from the rate cuts, the group said. Many others are tapping into the lower rates by refinancing high-rate mortgages giving them a windfall of cash to spend or pay down debt.
Still, many economists wonder whether the Fed acted in time to prevent a recession.
"With consumption growth likely to remain very slow, investment weak, and firms trying to pare back their inventories, it is questionable whether the economy will be able to sustain a positive growth rate in the next two quarters," said Dean Baker of the Center for Economic and Policy Research.

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