- The Washington Times - Tuesday, March 20, 2001

As the Federal Reserve convenes its regularly scheduled meeting today, the question isn't whether Fed Chairman Alan Greenspan and his colleagues will lower the overnight federal funds rate. Rather, the question is by how much the Fed will reduce that benchmark interest rate. In January the Fed lowered the fed-funds rate a full percentage point to 5.5 percent; and the expectation is that the rate will be reduced by at least half a percentage point today. Interestingly, in the wake of last week's hammering in the stock market, some Wall Street gurus, who for years have been telling Mr. Greenspan that skyrocketing stock market valuations were none of his business, are now demanding that the fed-funds rate be reduced by as much as a full percentage point today in response to the long-overdue stock market correction.
Under the assumption that a recession has not already begun at some point during the current quarter, this month the nation's longest economic expansion marks its 10th anniversary. For a variety of reasons, however, nobody is celebrating. Instead, much misplaced blame seems to be directed the Fed's way for raising short-term interest rates by 1.75 percentage points between June 1999 and May 2000. The blame is misdirected. As everyone knows, three-quarters of a percentage point of that cumulative rate increase represented the Fed's taking back, as expected, the emergency 0.75-percentage-point reduction it had engineered in response to the burgeoning Asian financial crisis in the fall of 1998. In retrospect, the additional 1-percentage-point increase hardly seemed excessive in the face of OPEC's more than tripling its oil prices, which, it's worth recalling, caused consumer price inflation to increase by nearly 2 percentage points from 1.6 percent in 1998 to 3.4 percent in 2000.
To be sure, the economy is in trouble. If economic growth hasn't become negative, it has unquestionably slowed significantly. After roaring at more than 4 percent a year during the last four years, U.S. economic growth hit the wall during the second half of 2000, falling to an annual rate of 1.1 percent during the fourth quarter. The economy's deterioration has continued in 2001. Retail sales declined in February, when industrial production fell for the fifth consecutive month as factories reached their lowest level of capacity utilization less than 80 percent in nine years.
Despite all the bad news in the stock market during the past year and the abysmal news of last week, however, some perspective is necessary. At week's end, the Nasdaq index, for example, was still nearly four times its 1991 average daily value. And the Dow Jones industrial average was more than three times its 1991 level and more than 50 percent higher than it was on Dec. 5, 1996 when Mr. Greenspan warned about "irrational exuberance."
Unless there is a genuine liquidity crisis, as there was when the Dow Jones industrial average collapsed in October 1987, the Fed ought not be in the business of bailing out imprudent investors who succumbed to dot-com mania and other speculative bubbles of recent years. On the other hand, inflationary pressures have significantly subsided in recent months, offering the Fed the opportunity to lower the rate once again. Half a point seems just about right for starters.

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