Greenspan, got onto the reservation ala tax cuts yesterday in his testimony when he said that the
size of the surplus made tax cuts possible
For the first time,he offered tentative support for a tax cut saying: "Should
current economic weakness spread beyond what now appears likely,
having a tax cut in place may, in fact, do noticeable good."
Greenspan's view of the situation was underscored by news from
other fronts. The employment cost index came in at 0.8% for the
fourth quarter, lower than the expected 1.1%. Existing home sales
fell sharply in December, 7.4%. And the list of companies planning
layoffs is growing: J.C. Penney, 5,300; Sara Lee, 7,000; Lucent,
16,000 and AOL Time Warner, 3,000. WCOM, 15,000
the issue with tax cuts is that these will tax time to work through congress and get passed and then a lag time
until they become felt.
here is some interesting observations on the FED and as it's pointed out... this is a FED induced recession, so
AG can come in and theoretically pull us out if he's so inclined.
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Fighting Off Recession
The first indicators of the 2001 economy show a continued worsening in the manufacturing contraction (recession) and consumer sentiment. Though the manufacturing sector is expected to lag any upturn in the economy, we were optimistic that the aggressive Fed ease in early January and the expectation for a follow-up ease at month-end would turn or at least halt the plunge in consumer expectations. It didn't. The downward spiral in the economy is becoming self-propelled and argues strongly for another large dose of policy ease on January 31.
100 bp Ease in less than a Month
We (I) wasn't convinced that a 50 bp ease at month-end would follow the aggressive, surprise ease in early January until the evidence became to strong to down play. The chief reason for the hesitancy was that in the last 15 years the gradualist Greenspan Fed has never moved with this type of severity. We had to search all the way back to 1984 to see a monthly move in the funds rate larger than 1% (in either direction). This downturn, however, is Fed-engineered. And if the Fed wants to save the economy from recession by its own hand it has no choice but to act quickly and strongly.
The chart below shows the monthly movement of the Fed policy rate -- the federal funds rate. The rounds of tightening preceding the 1990 recession and 1995 soft-landing are clear, as well as the easing that followed. Also note the vast difference in policy behavior from the frequent and very sizeable moves in the early 80s to active but greatly reduced severity in the late 80's and early 90's. Over the last five years Fed policy adjustments have been limited as the policy-makers allowed the economy to run. Intervention to combat the global financial crisis in 1998 and the response to run-away growth in early 2000 provides the majority of recent policy adjustments.
The economic downturn (collapse) since mid-2000 is remarkable and accelerating though we do expect the aggressive Fed easing to pay off in the coming quarter. In a year the economy has turned from what Greenspan called a virtuous cycle with 6% annual growth to a plunge in the equity markets, an outright recession in manufacturing and now a strong collapse in consumer expectations which drive household spending. The economic downward spiral is catching all sectors now. The sharp drop in January consumer expectations may be the best example as the massive 17% plunge over just two months showed no sign of slowing after the Fed's early Jan ease. Moreover, the revisions to the leading indicators index show the first signal of recession arrived way back in July with 3 consecutive declines and was supported in November with a 6 month growth rate of -1.1% -- a another recession signal issued only twice since 1990
The final straw for more aggressive Fed easing at month end comes with the vastly increased risks to the economy. Not only through the forceful pull of the downward spin but through the result of power outages in California. California accounts for an impressive 1/8 of total U.S. output. The planned power outages are a tremendous negative growth risk to production as the consumption side suffers the lose of the spendthrift consumer. Look for another 50 bp cut in both the federal funds and discount rate on the Jan 31 end of a 2 day FOMC meeting. The funds futures market currently prices in a full 50 bp month-end ease and puts June funds at 5.00%.
Fed Calendar
Date Time Location Event
Jan 25 10:00 DC Greenspan testifies to Senate Budget Comm on fiscal policy
Jan 30 14:00 Ex Fed vice chair Rivlin on Fed outlook
Jan 31 14:15 DC FOMC Policy Announcement
Feb 01 14:00 DC FOMC Minutes
Feb 07 19:00 Chicago Fed's Moskow (voter) on productivity and economy
Feb 15 13:15 Fed's Poole (voter) on 2001 economic outlook
Feb 16 14:00 BMA recommends early close
Mar 07 14:00 DC Beige Book
Mar 20 14:15 DC FOMC Policy Announcement
Mar 22 14:00 DC FOMC Minutes released
Mar 27 08:00 DC Greenspan on policy for a growing economy
May 02 14:00 DC Beige Book
May 15 14:15 DC FOMC Policy Announcement
May 17 14:00 DC FOMC Minutes released
Jun 13 14:00 DC Beige Book
Jun 26
FOMC Meeting (first of 2-day)
Jun 27 14:15 DC FOMC Policy Announcement
Jun 28 14:00 DC FOMC Minutes released
Aug 08 14:00 DC Beige Book
Aug 21 14:15 DC FOMC Policy Announcement
Aug 23 14:00 DC FOMC Minutes released
Sep 19 14:00 DC Beige Book
Oct 02 14:15 DC FOMC Policy Announcement
Oct 04 14:00 DC FOMC Minutes released
Oct 24 14:00 DC Beige Book
Nov 06 14:15 DC FOMC Policy Announcement
Nov 08 14:00 DC FOMC Minutes released
Nov 28 14:00 DC Beige Book
Dec 11 14:15 DC FOMC Policy Announcement
Dec 13 14:00 DC FOMC Minutes released
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