- The Washington Times - Thursday, June 28, 2001

The Federal Reserve yesterday cut interest rates by a quarter point to their lowest levels in seven years, citing the threat to the economy from faltering global growth and weak spending by U.S. consumers and businesses.
Stocks fell as Wall Street registered disappointment that the cut was not as big as the five half-point rate cuts the Fed ordered earlier this year. But the central bank in its statement left the door open to more rate reductions if the economy shows no signs of recovery this summer.
Fed watchers saw yesterday's smaller rate cut as a compromise designed to give the Fed time to see if its earlier rate cuts and $100 billion of tax rebates to be mailed out starting next month spark a revival in the next few weeks. Some said it was a signal that the Fed will stop cutting rates if a recovery sets in.
Since the central bank started cutting rates in January, most sectors of the economy have slowed or gone into recession, and growth among key trading partners in Europe and Japan has slipped or turned negative. But economists caution that it takes time for rate cuts to work their "magic" on the economy.
"Give the rate cuts a chance. The Fed's actions are the most aggressive in over a decade," said Richard Yamarone, economist with Argus Research Corp. He said the earliest signs of improvement in the economy are likely to come next month.
Major stock indexes are all down since the beginning of the year, and yesterday the Dow Jones Industrial Average lost another 70 points after the Fed's decision. The stock market's continuing woes worry some economists because the market usually is one of the earliest barometers of recovery in the broader economy.
The market battering reflects the recession in the hardest-hit sectors: business profits, capital spending, manufacturing and technology. Some of these areas may not see recovery until next year, analysts say.
"The economic and industrial situation in 2001 has been much worse than expected," said National Association of Manufacturers President Jerry Jasinowski. He said the production losses in manufacturing have been "comparable to the recession of 1990-91" with "no clear signs of recovery."
Martin Regalia, chief economist with the U.S. Chamber of Commerce, said that outside of manufacturing and technology, however, the economy is doing fine.
"Banks are doing great. They've got solid profits and are leading the way. They have the money to lend, and they're willing to lend it. There's nothing remotely resembling a credit crunch," he said.
Yesterday's cut in two key bank lending rates controlled by the Fed provided banks with further enticement to generate loans to consumers and business customers.
Major banks quickly lowered their prime lending rate by a quarter point to 6.75 percent, triggering lower rates on credit cards, adjustable-rate mortgages and many other loans.
In part because of the dramatically lower rates this year, "the housing market is just doing superb," Mr. Regalia said, with residential construction growing at a 3 percent annual rate and helping to prop up the rest of the economy.
Consumer spending has slowed, he added, but it still supports growth. And small businesses are doing very well, he said, in large part because of the improving credit conditions, easing in the drum-tight labor market this year, and continuing growth in the large service sector of the economy.
"We've fixated far too much on the stock market, and far too much on technology," Mr. Regalia said, although he conceded that consumer confidence during the recent downturn has been linked to a substantial degree to the ups and downs of the stock market.
"The Fed is trying to continue to support recovery, but not overdo it," he said. "They don't want to retrench or change gears too quickly because they have to wean Wall Street away from this constant expectation of more, more, more."
David Orr, chief economist with First Union, noted that the Fed statement gave no reason for yesterday's smaller rate cut, an ambiguity that will lead to widely differing interpretations of the move.
The decision may be a political compromise between members of the Fed's rate-setting committee who wanted a deeper cut and those who think the Fed has done enough, he said. Several of the 12 members recently have raised concern that the Fed could be overstimulating the economy and aggravating inflation.
The move may also reflect the recent collapse of gasoline and other energy prices, Mr. Orr said, which lowers inflation, helps to ease the profit crunch on businesses, and stimulates the economy by freeing up money for consumers to spend on other things.

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