- The Washington Times - Tuesday, June 26, 2001

Having already slashed short-term interest rates five times this year each time by a relatively hefty one-half percentage point the Federal Reserve's monetary policy committee begins its two-day meeting today. This, at a time when each of the three largest economies of the G-7 the United States, Germany and Japan has either fallen into recession or may be teetering at the brink of a downturn. Not since the oil-price-induced recession of 1974-75 have the three largest economic blocs simultaneously experienced deep downturns, which had the unavoidable effects of reinforcing and exacerbating each other.

The Economist recently reported that, for the three-month period ending in May, the total industrial output for the United States, the 15-member European Union and Japan declined by 0.5 percent compared to a year earlier. Given that growth of industrial production had been 6 percent for the year before the March-May 2000 period, the dramatic rate of change in output represents the sharpest-ever decline for any 12-month period.

Things could get quite dicey throughout the world's economic landscape. Japan, whose economy has been dead in the water for a decade, experienced negative growth during first quarter, strongly suggesting it was already mired in yet another recession. Reporting that German business confidence and manufacturing orders had both plunged recently and that second-quarter growth in Germany was "widely estimated to have slipped to zero or below," the weekend edition of the Financial Times greeted its readers with the headline, "Germany may be heading for recession."

Meanwhile, in the United States, average annual economic growth for the six months ending in March fell to about 1 percent, compared to an annual growth rate of more than 6.5 percent that prevailed during a comparable period a year earlier. For the quarter ending Saturday, U.S. economic growth will likely be at or near zero. Indeed, as the Fed itself reported earlier this month, U.S. industrial output has declined for eight consecutive months. Business investment has collapsed. Moreover, in an economy where consumer spending represents two-thirds of gross domestic product, the rate of increase in retail sales has slowed to a crawl. Unemployment has increased by a half-percentage point since October. The manufacturing sector has shed nearly 500,000 jobs this year alone, and total nonfarm payroll has fallen by more than 200,000 jobs during April and May.

With output and employment moving in the wrong direction and energy prices expected to be subdued in future months, there is little to worry about on the inflation front, especially in an economy whose capacity utilization rate is 77.4 percent, or nearly 5 percentage points below the 1967-2000 average. Globally, capacity utilization has fallen to a 15-year low.

Thus, the overwhelming danger, both nationally and globally, continues to be an imminent downturn in output, not a resurgence of inflation. The available evidence cries out for another aggressive move. The Fed should reduce the federal funds rate, which is the interest rate banks charge each other for overnight loans, from 4 percent to 3.5 percent.

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