- The Washington Times - Wednesday, August 14, 2002

The Federal Reserve yesterday said it is leaning toward cutting interest rates as economic growth softens in the face of weak financial markets and problems with corporate accounting.
The Fed's statement after a daylong meeting of its rate-setting committee provoked a sell-off on Wall Street, where several leading investment houses had raised hopes that the central bank would cut rates to prevent the economy from falling back into recession.
The Dow Jones Industrial Average lost 206 points after the Fed ignored attempts to appease investors. A move to lower rates would concede an increased risk of a "double-dip" recession from the spillover of market setbacks.
"The economy does seem softer," said Richard Yamarone, chief economist at Argus Research Co., but "the Fed didn't want to send the message that the economy is in desperate need. The last thing the Fed wants to do is appear as if it is bailing out the stock market."
While Wall Street suffers through the worst bear market in a generation, consumers for the most part have been spending steadily despite a plunge in the confidence index in recent weeks, he said.
A Commerce Department report released yesterday showing a healthy 1.2 percent increase last month in retail sales, spurred mainly by booming business at auto dealerships, indicated that consumers were far from defeated.
Even more importantly, Mr. Yamarone said, record levels of home and auto sales show that the Fed's big rate cuts last year are working to revive the economy and that further moves would accomplish little.
With mortgage rates at record lows and auto-loan rates as low as zero percent, "high interest rates aren't preventing anyone from buying a car or a house," said Sung Won Sohn, chief economist at Wells Fargo & Co.
The benefits of further rate cuts, he said, would be "dubious" and would only confirm fears of investors and consumers, who are suffering primarily from a loss of confidence rather than a loss of buying power.
Doug Duncan, chief economist with the Mortgage Bankers Association of America, said mortgage financing activity this year is on pace to rival last year's record-setting level of more than $2 trillion.
He said the Fed is likely to cut interest rates at its next meeting in September only if upcoming reports confirm the economy's "choppy" performance.
Refinancings have been behind much of the consumer spending growth in the last year, enabling the two-thirds of Americans who own homes to lower their debt loads and take out cash for cars, education and other big purchases.
Thirty-year mortgage rates have dipped to record lows of around 6.3 percent, spurring a refinancing wave that should unleash another $40 billion to $50 billion in consumer spending, said Diane Swonk, chief economist with Bank One Corp.
That, in addition to auto dealers' renewed offers of zero-percent financing last month, could explain the robust sales of sport utility and other vehicles, she said.
Ms. Swonk expects economic growth to accelerate in the final half of the year, despite the gloom on Wall Street. "The only major concern is continued weakness in the stock market, which can be traced more to a crisis of confidence than deteriorating economic conditions."
If the market's woes aggravate the credit crunch affecting low-rated corporate borrowers, she said, the Fed "would not hesitate to cut rates."
She cautioned that the economy would not have the robust growth of the late 1990s, but more of a weak recovery from last year's shallow recession, much like the rebound from the 1990-91 dip.
"The recovery will not be as painful for Main Street as in the early 1990s because we are starting from much lower levels of unemployment," she said. "Wall Street should eventually benefit," as stocks are undervalued and have ample room for growth.
Joel Naroff of Naroff Economic Advisers said the Fed may have created more uncertainty and satisfied nobody by indicating that it is leaning toward cutting rates while not actually doing so.
The Fed has noted that the problems emanate from the financial markets and not the economy, he said, yet the central bank has little control over the markets.
As a result, the Fed "temporized" in a play for time, he said, allowing several more weeks to determine whether the markets' threat to the economy would warrant further action.


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