cbs.marketwatch.com
Fed sees recession as greatest risk
By Rex Nutting, CBS.MarketWatch.com
Last Update: 2:19 PM ET Dec 19, 2000
WASHINGTON (CBS.MW) -- The Federal Reserve warned Tuesday that a recession is now
the greatest risk to the U.S. economy.
The Federal Open Market Committee did not, however, lower interest rates in an effort to
stimulate the economy, a sign that the Fed does not see negative growth as an immediate
threat.
The Federal funds rate remains at 6.5 percent and the discount rate remains at 6 percent.
Recent data, the Fed said, "suggest that economic growth may be slowing further." At the
same time, while inflationary pressures persist, "they are diminished."
Wall Street expected a switch in the policy directive wording, but no change in actual policy.
They expect the Federal Open Market Committee to begin lowering interest rates early next
year for the first time since the depths of the global financial crisis in November 1998.
The Fed funds rate is the rate banks charge each other for loans to meet the Fed's reserve
requirements. The discount rate is the rate the Fed charges for overnight loans.
The Fed had tightened monetary policy six times between June 1999 and May 2000, when the
FOMC's major worry was inflationary pressures from tight labor markets.
Inflation did tick up in during the Fed's tightening cycle, but the increase was mostly due to
higher energy prices.
Although the jobless rate is still hovering near 30-year lows at 4 percent, the Fed now sees a
recession as the biggest risk to economic stability.
Technically, a recession is defined as two consecutive quarters of falling real domestic
product.
Federal Reserve Chairman Alan Greenspan signaled the switch in Fed thinking two weeks
ago in a major speech to bankers, in which he warned that greater caution from lenders or
further loses in the stock market could lead to "excessive softening" in demand. See full story.
Worries about a weak economy are concentrated in Wall Street, where dozens of major
corporations are warning of slower growth in revenues and profits.
On Main Street, by contrast, the economic picture still looks relatively bright. Jobs are
plentiful, wages are rising and interest rates have fallen from their highs.
The only dark clouds for consumers are high prices for petroleum and natural gas and the
disappointing performance in their retirement accounts. Consumer confidence plunged in
November, but optimism about the economy remains at high levels by historic standards.
Many economists (like Bank One's Diane Swonk) believe the consumer is still strong and that
the Fed's worry about a recession is overblown.
Their argument: Consumer spending has stalled temporarily, so retailers and wholesalers are
cutting back on their new orders to manufacturers, who are responding by cutting production
and their workforce.
But once inventories are worked off and consumers resume spending, the economy ought to
rebound, these economists say.
What makes the Fed's decision so tough is that changes in monetary policy can take a year or
more to be fully felt in the economy.
If the economy is really heading for a fall, then the Fed may be too late. On the other hand, a
rate cut might be too stimulative if the economy rebounds later next year.
One factor that may give the Fed some level of comfort: The bubble in the stock market has
been lanced. The wealth effect is no longer increasing demand faster than supply can keep
up. |
