- The Washington Times - Wednesday, January 31, 2001

When Federal Reserve Board Chairman Alan Greenspan and his central bank colleagues conclude their regularly scheduled two-day monetary policy-making meeting this afternoon, they are almost certain to announce that they have decided to reduce short-term interest rates. What is less certain is whether the Fed will decrease the so-called federal funds rate, which is the rate banks charge one another for overnight loans, by a quarter percentage point or by a half percentage point, as it did in a surprise move Jan. 3. Based on current inflationary pressures, which are quite subdued, and the state of the economy, which has deteriorated rapidly in recent months, the Fed would be wise to reduce the federal funds rate by a half percentage point.
This page has long argued that the principal duty of the Fed is to preserve price stability. As Mr. Greenspan stated in his testimony last week before the Senate Budget Committee, inflation currently presents no serious problem. Indeed, several price indices confirm that there is no reason today to fear an acceleration of inflation. It was just such a fear of accelerating inflation that prompted the Fed to increase short-term interest rates by 1.75 percentage points between June 1999 and May 2000. Inflation measured by the consumer price index, for example, has significantly decelerated from an annual rate of 6.1 percent during last year's first quarter to 2.1 percent during the fourth quarter. The producer price index for finished goods shows an even greater deceleration of inflation, falling from an annual rate of 7.9 percent during the first quarter of last year to 2.0 percent during the fourth quarter.
If inflation is no longer problematic, the same cannot be said about the U.S. economy. Indeed, Mr. Greenspan acknowledged in his congressional testimony last week that the annual rate of economic growth is "probably very close to zero at this particular moment." The data confirm his concern. Total economic output, which increased at an annual rate of 7 percent during the second half of 1999, rose at only a 2.2 percent annual rate during the third quarter last year. (The fourth quarter annual growth rate, which will be announced today, is expected to fall below 2 percent.) For five months in a row, the Purchasing Managers' Index a composite of employment, inventories, production, orders and delivery times has remained below 50 percent, indicating that the manufacturing sector is already in recession. After declining 0.3 percent during both November and December, industrial production fell 0.6 percent in December, as auto production plunged nearly 5 percent. After declining 0.1 percent in October and 0.5 percent in November, retail sales increased a paltry 0.1 percent in December.
If present economic conditions look bad, the future looks even worse. Last week the Conference Board reported that its Index of Leading Economic Indicators fell in December for the third consecutive month, suggesting that the economy is heading into a recession. Yesterday, the Conference Board reported that its Consumer Confidence Index plunged 14.2 points in January, falling for the fourth month in a row and reaching its lowest depth in more than four years.
In the absence of any observable inflationary pressures, the Fed should reduce short-term interest rates by half a percentage point in order to reinvigorate the U.S. economy.

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