biz.yahoo.com
Thursday June 21, 2:17 am Eastern Time
Post: Fed Officials Worried Over Rate Cuts
As U.S. economic growth remains sluggish, some Federal Reserve officials are growing increasingly concerned that lower interest rates have failed to stimulate the economy, The Washington Post reported on Thursday.
After five half-percentage-point rate cuts this year -- the most aggressive such actions by the central bank in nearly 19 years -- there is no sign yet of a rebound.
In an front-page analysis, the Post's John Berry said Fed officials believed their policy actions would eventually be effective, but they could not be sure when.
That makes it more difficult for them to decide whether, and by how much, to cut interest rates again when the central bank's top policymaking group, the Federal Open Market Committee, meets next Tuesday and Wednesday.
Given a long lag between changes in interest rates and noticeable changes in the economy, the impact of the first of the interest rate cuts this year, which came Jan. 3, should be becoming visible now.
But the Post said some Fed officials were becoming increasingly concerned that any rebound in growth might not begin until next year and that it could start out weaker than many investors and analysts were expecting.
For instance, when the Fed cuts rates, the value of the dollar usually falls, making U.S. exports cheaper for foreign buyers and thus stimulating U.S. production. But that hasn't happened this year, Berry noted. The dollar kept rising.
[Part of this might be the fact that gold has lost it lustre. Now the only safe place to put money as the global economy slows down is the US.]
Lower rates also usually give the stock market a boost, which can stimulate consumer spending as household wealth increases. But stock prices have remained stubbornly weak, particularly for high-tech companies whose share prices have plummeted from their peaks of more than a year ago.
[How do you stimulate consumer spenting when the news every day is about the 10,000 high paying high tech jobs that just went away. A lot of people still have large tax bills from last years gains, that now have evaporated in this years sell off. ]
The Post said short-term rate cuts also usually brought down longer-term rates, which encouraged businesses to invest more in new plants and equipment because it was less costly to borrow. But many companies had a large inventory of unsold goods and were reluctant to increase their capital spending.
[There is alos a lot of excess manufaturing capacity brought on by the greater efficiencies of the new technology. You need less people to make more so price remain low.]
One area where Fed actions have helped has been in holding down mortgage rates, which has contributed to the still-strong housing market, Berry wrote.
FURTHER CUTS WILL NOT BOOST BUSINESS INVESTMENT
But Fed officials now say further rate cuts will not boost business investment under these circumstances, and they have no confidence that more rate cuts will cause the dollar to weaken. And as long as business profits are falling, the stock market isn't likely to stage a continuing rally, Berry wrote.
Tax refund checks, going out to Americans starting next month, will give the economy a temporary shot in the arm, Berry wrote. But he said a number of Fed officials did not believe the tax cut would have a significant impact on the economy.
So he said the goal of many of the Fed policymakers was to provide enough of a cushion through lower rates to keep the economy out of a recession until businesses were able to work off excess inventories and absorb spare production capacity.
Berry said some members of the Fed's policy-making council were concerned that rates could be cut so far that inflationary pressures would rise when economic growth picks up later this year or in 2002. A few members may well be arguing for a pause in the rate-cutting campaign at Tuesday's meeting, he said.
There was also growing worry that the economy could still tip into a recession before the stimulus from the rate reductions and the tax cut kicked in.
[More likely scenario in my mind]
Many investors and financial analysts expect the Fed to reduce rates again next week. Until last week, most expected only a quarter-percentage-point cut in the FOMC's target for overnight interest rates, to 3.75 percent. That would put the target 2.75 percentage points lower than its 6.5 percent level at the beginning of the year. |
