- The Washington Times - Wednesday, November 7, 2001

The Federal Reserve Board yesterday slashed interest rates by another half percent to the lowest levels in a generation in an effort to cushion the economy from deep recession.
The central bank's cut to a 40-year low of 2 percent in the main lending rate for banks pushes it well below the 2.6 percent inflation rate. Its aggressive resuscitation efforts since the September 11 terrorist attacks have sparked a rash of interest-free auto sales and are a principal reason economists predict a robust recovery from recession next year.
Major banks quickly followed the Fed's 10th rate cut this year with a cut in the prime lending rate to 5 percent from 5.5 percent the lowest since 1972. That will draw down the rates on credit cards and home equity loans and make borrowing less expensive for businesses.
Auto companies had slashed their loan rates to zero in a bid to attract buyers, sending sales of cars and sport utility vehicles to record levels even as other consumer spending collapsed last month. Other retailers are following suit in hopes of mimicking their success.
"We saw the effects that zero-percent financing had on automotive sales," said Richard Yamarone, economist with Argus Research Corp. "The Fed probably wants to see similar effects economywide" by adopting a policy of zero-percent financing for banks.
The Fed's actions have stoked a refinancing boom, with the rate on 30-year mortgages near a 30-year low of 6.5 percent. Also aiding the home-finance market was a decision by the Treasury Department last week to eliminate its 30-year bond, making such long-term investment instruments more scarce and prompting a dramatic reduction in long-term rates.
Lyle Gramley, a former Fed governor, said the boom in auto sales and refinancings shows the Fed's rate-cutting campaign since January is working and the economy, as a result, may not be as weak as some think.
"The response to the zero-rate auto financing is a most important development," he said. "It indicates that consumers have not gone into a shell and curled up in the fetal position. They're responding normally to economic stimulus" despite a precipitous drop in consumer confidence and sharp increase in unemployment in the last two months.
"Mortgage refinancings are up a ton and have been an important source of support for consumer spending this year," he said. "Lots of people have cashed out equity and spent it on home improvements," and others have made room for more spending in the future by lowering their monthly mortgage payments, he said.
The stock market's positive reaction to the Fed's rate cut yesterday also was a good sign, Mr. Gramley said, since stocks failed to improve on Fed actions earlier this year and were one reason for the economy's muted response to earlier rate cuts. The Dow Jones Industrial Average soared after the Fed's announcement, overcoming a 50-point loss and ending with a 150-point gain.
"The stock market is one of the better leading indicators of the economy," he said. Its optimistic mood in the last month sometimes in the face of grim economic news suggests that an economic recovery may be only six months away.
Another reason to be optimistic is the massive dose of stimulus resulting from accumulated federal tax cuts and increased spending on defense, security, reconstruction and other items in the aftermath of the attacks totaling as much as $230 billion over a year, Mr. Gramley said.
Despite these positive signs, the economy faces a period of gloom in the next few months as the forces of recession continue to play out, he said. The jump in auto sales is not likely to be repeated once the interest-free loans are withdrawn, and a major risk is that higher unemployment will cause consumers to retrench even further.
House Speaker J. Dennis Hastert applauded the Fed's action and called on the Senate to follow the House's example and pass an economic-stimulus package that could be on President Bush's desk by Thanksgiving.
"I believe it's fairly obvious that more than just rate cuts are needed" to restore lost jobs and get the economy growing again, the Illinois Republican said.
Some economists, however, say the measures under consideration in Congress will do little to help the economy.
"Neither the corporate tax breaks being pushed by the Republicans nor the public-works programs being peddled by the Democrats have much to do with the short-term stimulus we need," said David Wyss, chief economist with Standard & Poor's Corp.
Still, he expects the economy to recover next year in response to the Fed's accommodative policies. It also is being helped by the Treasury's move to lower long-term rates and a dramatic drop in oil prices to the lowest levels in two years, he said.

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