Bold Fed seen as potent U.S. anti-recession force
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By Caren Bohan
WASHINGTON, April 18 (Reuters) - The firepower of four
interest-rate cuts by the Federal Reserve -- including its
surprise move on Wednesday -- will go far toward warding off a
U.S. recession, analysts said.
But even after cuts totaling 2 percentage points this year,
many economists said the central bank's campaign against an
economic slowdown is not over yet.
"Clearly, the message is that the Fed has every intention
of continuing to cut until there is an economic recovery," said
Lou Crandall, an economist with the Wall Street research firm
Wrightson Associates.
"They are almost certainly going to ease again in May,"
Crandall added, referring to the Fed's next regularly scheduled
meeting on May 15.
Twenty-four of the 25 primary dealers of U.S. government
securities polled by Reuters on Wednesday forecast that the Fed
would cut rates for a fifth time this year at that meeting.
Despite an avalanche of gloomy news about weak corporate
profits, sagging consumer confidence and a slackening job
market, the Fed managed to catch Wall Street off-guard with
Wednesday's half-point interest rate cut.
The myriad of Fed watchers who parse every utterance from
policymakers had concluded that the central bank was sanguine
enough about the U.S. economy's health to delay any action
until the mid-May meeting.
THEY ALL CALLED IT WRONG
How did they all get it wrong?
For one thing, Fed rate changes outside regularly scheduled
meetings, such as Wednesday's move, are extremely rare. The
last time the Fed took such a step was on Jan. 3 but the last
time before that was October 1998.
And Fed officials, who had been out in force talking about
the economy in recent weeks, seemed to go to lengths to
emphasize that they preferred to move at meetings.
"Not only must there be a significant benefit (to change
rates between meetings), but the benefit has to be large enough
to outweigh the costs of setting a precedent," St. Louis
Federal Reserve Bank President William Poole said in a Reuters
interview last month.
Moreover, Poole and many of his colleagues, particularly
the other presidents of the regional Fed banks, have played
down the threat of a recession.
They have emphasized that factories were beginning to pare
down their bloated inventories, which could set the stage for a
recovery soon.
But as the statement released with Wednesday's rate
announcement showed, the Fed is clearly worried that a pullback
in business investment could prove to be a big drag on the
economy going forward and they want to counter that.
"Capital investment has continued to soften and the
persistent erosion in current and expected profitability, in
combination with rising uncertainty about the business outlook,
seems poised to dampen capital spending going forward," the Fed
statement said.
NO TRIGGER IN DATA
In contrast to what analysts might have expected, there was
no "smoking gun" in the form an economic report that might have
triggered the move.
U.S. payrolls fell by a large 86,000 in March but they had
risen at decent rates in both January and February. Industrial
output has been extremely weak for several months but it had
improved in the latest set of statistics.
On the other hand, the anecdotal evidence of a flagging
economy was piling up.
For example, technology bellwether Cisco Systems Inc.
issued a profit warning, citing a glut of unsold
inventories.
Private surveys showed economists starting to up their
forecasts for a recession, projecting that the job market would
worsen and that declines in the stock market would put a damper
on consumer spending.
"There are a lot of negatives hanging out there," said Bill
Cheney, chief economist at John Hancock Financial Services in
Boston.
Cheney and other analysts said the Fed may get added
mileage out of its latest rate cut because it took nearly
everyone by surprise.
"The timing has to do with getting the biggest possible
impact from the move," he said.
Indeed, the action delighted the U.S. stock market,
spurring an 8.1 percent surge in the technology-laden Nasdaq
Composite Index and 3.9 percent jump in the Dow Jones
industrial average.
"I think that we will look back on this as a key moment
that changed psychology," said James Glassman, economist at
J.P. Morgan in New York. "It shows people that the Fed has
zeroed in on exactly what it needs to do."
Glassman agreed the Fed would continue cutting rates.
He said the timing of the next move would depend on the
data but projected the federal funds rate, brought to 4.5
percent by the Fed's latest move, would be chopped to 4 percent
within the next few months.
REUTERS
Rtr 22:43 04-18-01 |
