- The Washington Times - Wednesday, March 21, 2001

The Federal Reserve, citing weakness in the global economy and a threat to consumers from the plummeting stock market, yesterday cut interest rates by a half point for the third time this year.
The central bank said it remains on alert since quickly moving developments could tip the sluggishly growing economy into recession.
Major banks immediately followed the Fed's reduction in two key bank-lending rates with a cut in their prime rate to 8 percent from 8.5 percent, ensuring relief will spread quickly to consumers and businesses.
Main Street business groups applauded the Fed's move as appropriate medicine that will keep consumers in the pink.
But Wall Street was sorely disappointed. Stock investors were hoping the Fed would slash rates by an unprecedented three-quarters of a percentage point, mostly to counteract the plunge in the market that has driven all the major stock indexes lower this year.
The Dow Jones Industrial Average swooned by 238 points to end at 9,721, and the Nasdaq Composite Index dropped 5 percent, or 94 points, to 1,858. Both indexes had been up slightly before the Fed's decision was announced in midafternoon.
"The financial markets have been misbehaving, throwing tantrums and hoping" for too much, said Richard Yamarone, economist with Argus Research Corp.
"This was a wise move," he said. "The Fed doesn't want to appear to be kowtowing to the equity markets" and overreacting when the economy seems to be improving, he said.
Jerry Jasinowski, president of the National Association of Manufacturers, said the Fed's action was "a major first step toward calming our economy's turbulence by enhancing corporate profits, shoring up capital spending and improving business confidence."
Mr. Yamarone said low unemployment, which has barely budged from a 30-year low near 4 percent, continues to stoke consumer spending on everything from houses to cars, producing "impressive" gains in retail and home sales this year despite a steep drop in business spending on technology equipment.
"The economy, outside the technology arena, may already have bottomed" in the last quarter of 2000, when growth dropped to a 1.1 percent rate, he said. Argus estimates that the pace of growth has picked up since then to 2 percent or more in the current quarter.
"We simply cannot have a recession without a curtailment of job growth," Mr. Yamarone said, noting that in the last five recessions the unemployment rate jumped on average by 2.5 percentage points.
Besides enjoying still-solid gains in income, consumers are getting a windfall from a spate of mortgage refinancings since the Fed started cutting rates at the beginning of the year. A shower of tax refunds also is putting more cash in their pockets.
Perhaps in an attempt to soothe frayed nerves on Wall Street, the Fed gave a nod to the markets in its statement.
It noted that the risk of recession persists because of a collapse in business profits and investment spending that has turned into a vicious cycle dragging down stock values. The dramatic decline in stock portfolios prompted consumers to restrain their spending, the Fed said.
Main Street businesses continue to prosper as consumers spend apace, and even the smallest businesses are enjoying low interest rates and easy access to credit, said William Dunkelberg, chief economist for the National Federation of Independent Business.
"The concern of the Federal Reserve should be the real economy, not the level of the stock market," he said, pointing out that investors who put money in Nasdaq stocks in 1997 still doubled their money despite the 60 percent drop in that index in the last year.
Consumers are taking a bit of "a breather" right now after having spent themselves into debt in the last year, Mr. Dunkelberg said, but the resulting slowdown is normal and should be expected. The Fed should be careful not to overreact and risk reigniting inflation, he said.
"The issue for the Federal Reserve is whether lowering interest rates a lot will get people to buy even more cars," he said, despite already-jammed driveways.
This year's rate cuts, which doubtless will be followed by more in the spring, should suffice to "keep customers coming in the front door," he said.
Stock values will improve in coming months as the economy absorbs the "magic effect" of the rate cuts, the analysts said.
Manufacturers have been hit particularly hard by "a perfect storm" caused by high interest rates, high energy costs, an overvalued dollar and Japan's turn toward recession, Mr. Jasinowski said. "We're teetering on the edge of a recession… . The Fed is pulling us back from the brink."
This year's series of half-point rate cuts is "aggressive" by historical standards, said David Orr, chief economist with First Union Corp. But he said the Fed should have gone further because interest rates remain too high to stimulate growth.
"The longer it takes policy to become fully stimulative, the higher the risk of recession spreading from manufacturing and high tech to the rest of the economy," he said.

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