Rate cut betrays worries
By Globe Staff, 4/19/2001
The Fed's surprise cut in interest rates yesterday makes one
thing clear: The central bank was far more worried about the
economy's health than it had let on.
Chairman Alan Greenspan and his colleagues had been
fairly balanced in their public assessment of the economy.
Yes, there were problems, but there was no reason to panic.
The statistics appeared to support such a view.
''There has been nothing in the economic numbers that
would have compelled such an aggressive move,'' said
Wayne Ayers, chief economist at FleetBoston Financial.
So why the one-half percentage point cut in rates yesterday,
nearly a month before the next scheduled Fed meeting? The
answer is simple: Because the Fed was looking ahead, not
behind, and it didn't like what was coming.
To understand the situation better, allow us to use an
analogy.
Roughly a month ago, the Boston area was hit by torrential
rain. Some towns got as much as 5 inches. But weather
forecasters said rivers would not crest for another two or
three days.
The explanation seems to be that it takes time for the runoff
to pour back into the smaller streams and for the smaller
streams to feed the large rivers. Think of the whole thing as a
process that, once engaged, moves toward an inevitable and
destructive conclusion.
For the economy, the equivalent of the torrential rain was the
collapse of the Nasdaq Composite index. The Nasdaq fall
signaled serious problems in the companies in the new
economy. It meant that technology orders were drying up
and that customers were reining in spending on high-tech
gear.
The result of that pullback can be seen in the corporate
earnings being announced this month. Profits are down,
some companies are losing money, and many are
responding by cutting workers.
Consider the fate of Cisco Systems, once the darling of the
Nasdaq. The California networking company this week said
its sales would fall 30 percent this quarter, a startling
decline. Cisco also said it would shed 8,500 employees.
''This may be the fastest any industry our size has ever
decelerated,'' said Cisco chief executive John Chambers,
who went on to make a weather analogy of his own.
Chambers compared the screeching slowdown in his
business to a ''100-year flood,'' a once-in-a-lifetime disaster
that could not be foreseen.
Mark Zandi thinks Monday's Cisco warning may have been
what prompted Greenspan to act. ''It showed the new
economy was imploding,'' said Zandi, chief economist at
Economy.com, a Pennsylvania forecasting firm.
Greenspan is not just worried about Cisco. He is afraid that
a spate of layoffs will weaken consumer confidence. So far,
consumer spending on cars and houses has been the one
thing propping up the economy.
Again, think of the whole experience as a process with
multiple stages. There was the Nasdaq fall, the capital
spending slowdown, and the beginning of a round of layoffs.
Greenspan is hoping to head off the next step, a full-blown
recession, the financial equivalent of a river cresting above its
banks.
Fred Breimyer, chief economist at State Street Corp., said
Greenspan is not just worried about spillover in the US
economy. ''I think he knows that if our economy goes offline,
there will be no one else to fill the void,'' said Breimyer.
Asian and European economies are already slowing. Philips
Electronics, the big Dutch high-tech firm, this week
announced it was slashing 7,000 jobs. Mexico lowered its
economic outlook for 2001, blaming a dip in exports to the
United States.
Analysts make one more point about Greenspan's surprise
move. It is relatively risk free. ''There isn't any downside,''
said Zandi. Even with the rate cut, the economy is not about
to boom. If it does start to recover, the Fed can always hold
off on future rate cuts. The current betting is the central bank
will trim rates again when it meets in May.
Will Greenspan be able to avert the flood? No one knows.
But with his bold move yesterday he is clearly doing all he
can to ensure the United States stays safe and dry this
year.
P.S. Two weeks ago, we wrote an open letter to Greenspan,
urging him to cut rates. As we put it then, ''There is no nice
way to say this, Alan: You are behind the curve. You need to
cut rates more deeply and more swiftly.'' Our reasons
generally conformed with the explanation the Fed gave for
the rate cut yesterday.
We take no credit for the Fed decision. We just wanted a
chance to say, ''I told you so.'' |
