Fed expected to cut interest rates for seventh time
Associated Press
Tuesday, August 21, 2001
WASHINGTON, D.C. -- The Federal Reserve Board is expected to cut interest rates for a seventh time this year when policymakers meet today, extending
the Fed's most aggressive credit-easing campaign in nearly two decades.
Private economists see a move this week as a certainty, given the remarks made by Chairman Alan Greenspan and other Fed officials in recent weeks that
the country's year-long struggles with a weakening economy are not yet over.
"They have pretty much locked in another quarter-point rate cut," predicted David Wyss, chief economist at Standard & Poor's Co. in New York City.
"Alan Greenspan does not want another recession on his watch."
To keep the economy out of recession, the Fed has cut interest rates six times beginning Jan. 3. The first five cuts were half-point moves, the most aggressive
Fed easing since early 1982 when the Fed was slashing rates to fight the worst recession since the Great Depression.
At the Fed's last meeting on June 27, the Fed added a sixth rate cut, but the move was the more normal quarter-point reduction that the Fed has employed
under Greenspan, bringing the federal funds rate, the interest that banks charge on overnight loans, down to 3.75 percent.
While most analysts are looking for another quarter-point cut, some would not rule out a return to a bigger half-point move, arguing that Greenspan and
his colleagues might want to deliver a pleasant surprise to Wall Street investors, who already have factored in a quarter-point move.
"We still have a very uncertain economic situation out there," said David Jones, chief economist at Aubrey G. Lanston & Co. in New York City. "The stock
market is still walking on egg shells and the Fed has to have the market on its side to hope for any type of recovery anytime soon."
Manufacturers issued a plea Monday for a half-point cut, saying such a move was needed to help alleviate a slowdown in sales that has forced them to
eliminate 708,000 jobs.
[Bold emphasis added here:]
In a letter to Greenspan, National Association of Manufacturers President Jerry Jasinowski said the bolder half-point move is needed to counteract "a
sudden and unexpected deterioration overseas" that was raising the threat of a worldwide recession.
But many economists said the Fed would stick to a quarter-point move, especially since some Fed officials have expressed worries that the central bank
could overdo the rate cuts, laying the groundwork for inflation troubles next year.
The Bush administration is counting on lower interest rates plus the impact of nearly $40 billion in tax rebate money this year to boost consumer demand
and provide greater strength in the second half of the year.
Various economic indicators are flashing encouraging signs that an upturn might be imminent, including a report Monday that the Index of Leading
Economic Indicators rose by 0.3 percent in July, the fourth consecutive monthly gain.
While the economy eked out a barely discernible 0.7 percent rate of growth in the April-June quarter, forecasters surveyed by Blue Chip Economic
Indicators said they were looking for a slight rebound to growth rates of 1.7 percent in the current quarter and 2.8 percent in the final three months of this
year.
But because the rebound remains a forecast, not yet a reality, analysts said they would not be surprised by a further rate reduction in October.
"Between now and Oct. 2 is a long time, and no really knows for sure what will be happening then," said Sung Won Sohn, chief economist at Wells Fargo in
Minneapolis.
If the forecast of stronger growth turns out to be true, analysts said longer-term interest rates, which are set by financial markets, might have seen their lows
for the year.
Rates for 30-year home mortgages dipped to 6.92 percent last week, the first time they had fallen below 7 percent since March.
Sohn predicted that 30-year mortgage rates would rise to around 7.15 percent by the end of the year as the economy picks up. He said the current extremely
low rates likely would spur another flurry of mortgage refinancings and provide further support for home sales.
"This is only the 11th time in the last 25 years that 30-year mortgage rates have fallen below 7 percent," Sohn said. "It is a fairly rare opportunity to grab a
good rate."
© Copyright 2001 Star Tribune. All rights reserved.
EDIT: It is the statement above I emphasized in bold that make me believe that the turn-around and recovery are farther out that most investors want to believe and supports my reasons for having no longs other than in my IRA.
Stay in the Black! jimS |
