- The Washington Times - Wednesday, November 6, 2002

Last year, the Federal Reserve's policy-making committee lowered its benchmark short-term interest rate 11 times. Declining a cumulative 4.75 percentage points, the federal-funds rate fell from 6.5 percent to a 40-year low of 1.75 percent. This year, the Fed has held its fire through the first 10 months of 2002, waiting for 2001 rate reductions to work their way through the economy after the customary lags. With the economy essentially flat following a growth spurt during July and August, perhaps the time for waiting has now expired. The time to resume cutting short-term rates has returned.
The data are clear. Much of the economic activity that produced an annual growth rate of 3.1 percent during the third quarter was front-loaded. More than half of that growth occurred in the auto sector, whose sales plummeted during September and October, when they reached a four-year low.
New orders for manufactured durable goods fell 5.9 percent in September, the second monthly decline in a row and the biggest drop since last November. Industrial production fell in August and September. Last week, the Institute for Supply Management reported that the manufacturing sector declined for the second consecutive month in October, and the Commerce Department reported Monday that factory orders fell 2.3 percent in September, their second decline in a row.
The Fed's own Beige Book, released Oct. 15, reported that all Federal Reserve districts reported weak retail sales in September and early October. Indeed, retail sales fell 1.2 percent in September, as retailers brace for what they expect to be their worst holiday season in years. The Fed also reported that labor markets were "lackluster" in all districts. The October unemployment rate edged up to 5.7 percent; and the Labor Department reported last Friday that the third quarter's annual growth rate of 3.1 percent generated a measly 164,000 jobs in the nonfarm sector.
Last month, the Conference Board reported that its Index of Leading Economic Indicators, which has turned down in advance of each of the 10 U.S. recessions since 1948, declined in September for the fourth month in a row. The Conference Board reported Oct. 29 that its consumer-confidence index plunged 14.3 points in October, reaching a nine-year low. It was the steepest descent for any month since 1990, except during the immediate aftermath of September 11. Rarely does such a plunge occur outside of a recession.
Inflationary pressures? There aren't any. The question isn't whether to cut short-term rates. Rather, it is by how much they should fall. Having already waited too long to resume reducing rates, the Fed ought to seriously consider chopping half-a-percentage point off its target rate.

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