Thank You Mr. Alan Greenspan And Your Merry Knights
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Hong Kong, January 8 /SHfn/
A touch late in coming, perhaps, but certainly a dramatic gesture - gathering all your knights of the Federal Reserve Roundtable together by unexpected telephone call and making the sudden decision to cut interest rates right here and now by the largest amount in eight years and not wait until the next time the governors of the Fed were due to convene. Your action did indeed grab the world's attention. Of course, few read political winds better than Alan Greenspan who clearly knew when it was time to move.
All this demonstrates that there is as much of dramatics as there is of economics in determining a nation's economic policy. It is particularly so for a nation whose policies reverberate around the globe impacting everyone from a worker in a chip factory in Taiwan to a banker in Hong Kong to a farmer in France. Alan Greenspan's coup got the headlines, it got market investors, the press, just about everyone to heap praise on the Fed's bold action. It stepped in at the brink in a manner that suggests the cowboy in the white hat pulling the fair damsel of a sickly economy off the railroad tracks just as the train thunders down. If there is anyone in reach of a newspaper or television in these parts who doesn't know what the Fed has done, he clearly is asleep.
Implicit in the way this cut was pulled off is an impression the Fed would like to foster: The secretive boys and girls in the big white marble building in Washington are on the job, reaching down to pull the slipping American economy away from the abyss. That's part of the mystique of the Fed that all chairmen of that august body have fostered. Of course there is danger in such a swift, unexpected move. Conspiracy devotees wonder if there is some horrible news about the U.S. economy lurking that the Fed knows and we don't, perhaps that a recession is right at the door step.
So we are not denigrating what the U.S. Federal Reserve has pulled off. It was a signal that the central bank is not unmindful of a weakening American economy. The Fed's actions were two-fold: a 50-basis point cut in the Fed Funds Rate -- the rate banks generally charge each other for overnight loans -- and two 25 basis point cuts in the mostly symbolic discount rate in two days (done in two steps for legal reasons.) This rate technically is what the Fed charges to loan money to banks; banks rarely take that route now but it is the quickest way for the Fed to let banks know what it wants done to the interest rates the banks charge customers: bring them down to stimulate lending for consumer spending and industrial expansion.
And it most certainly worked as the main banks in the U.S. quickly cut their own lending rates. We remember the Fed lowering rates in the early '90s to halt a slowdown in the US economy. But the commercial banks stood on the sidelines, unwilling to cut their profits by lowering rates. It took several forceful messages from Mr Greenspan to bank CEOs before they joined the parade.
Even with immediate compliance this time, do not expect any sudden turnaround in the American economy. The economy of a nation that size simply does not turn on a dime. There is always a lag between interest rate changes and changes in economic activity. More rate cuts will be needed; this year is going to be a tough one all the way around. We have heard estimates of another 75 to perhaps 100 basis points cut by mid-year. It would help a lot if the European Central Bank joined in and if oil prices continue their erosion of recent weeks. At the very best, the US and thus the global economy will have a miserable first half but a good second half. That is at least the consensus view. It is hopeful, but it may not be accurate. American economic growth still is slowing -- not shrinking mind you, just slowing. It is pulling in fewer imports from Asia, and the American market is the dominant theme in Asian economic planning.
The US technology sector is among the worst hit and is of course the one that much of Asia's exports target. But there are other worries. Japan is in an economic Twilight Zone, simply unable to get its economy off dead center. Consumer spending is sluggish; the government is so much in debt - about 6 trillion US Dollars - bigger than any other industrialized country, it has no room to operate. And the Yen is inexorably weakening against the US Dollar, heading, some foreign exchange experts tell us, to around 125 to the Dollar. That means Japan imports less goods from anywhere, but particularly the United States. And that deepens the American slowdown and the slowdown of Asia.
Back to work, Mr. Greenspan.
I could not resist the Merry Knights |
