More NYT stuff -- "What the Fed Can't Do About This Recession."
November 25, 2001
ECONOMIC VIEW
What the Fed Can't Do About
This Recession
By LOUIS UCHITELLE
Monetary policy could not be better. The Federal
Reserve has reduced interest rates so
aggressively that lenders are almost giving
away money. The economy should be rising again in
response to so much easy credit. It is not rising, but
there is some response, which helps to explain why
the current, potentially severe recession is still a mild
one.
This is an uncommon recession. It has arrived after a
period of great plenty and excessive investment;
surfeit seems to reign and indebtedness surely does.
People turn away from the marketplace unless the
offer is truly tempting. Car sales, the most glaring
example, would not be booming today, or even above
water, without zero-interest loans, which the Fed makes possible. Without its rate cuts, the car companies could not
borrow cheaply enough to bear the losses from zero-interest lending for as long as they have.
Similar dynamics show up elsewhere, in each case helping to prevent the recession that started last spring from
producing more hardship and unemployment. Because of the rate cuts, for example, consumer confidence held up
until September, when layoffs finally unnerved the public, according to Richard Curtin, director of the University of
Michigan's monthly consumer surveys.
Home sales and home construction owe their persistent strength to 30-year
mortgages at 6 percent interest, unimaginable last fall. As mortgage rates fell,
families that already owned homes refinanced them and pocketed the savings
from the lower monthly payments. Or they took out low-interest home equity
loans and paid off high- interest credit card debt, again freeing money that they
either saved or used for another stab at spending — perhaps the last stab.
Some economists have tried to quantify the benefit to the economy from the
Fed's 10 rate cuts since Jan. 1. The gross domestic product, the standard
measure of economic activity, contracted in the third quarter at an annual rate of
0.4 percent. Once all the data is collected for that quarter, the rate of decline will
probably turn out to be 1 to 2 percent, according to Peter Hooper, chief domestic
economist at Deutsche Bank (news/quote) North America.
"That 1 to 2 percent would have been 3 to 4 percent" without the cuts, he said.
The rate cuts have helped in other ways to keep the economy from coming apart.
The dollar, for example, has been rising against other currencies, making American products more expensive
overseas and thus less competitive. But the rise would have been even greater without the sharp decline in interest
rates. Low rates make dollar investments less desirable, so presumably fewer people buy dollars, although in these
uncertain times there is still plenty of demand for the safety of America's currency.
Then there is the spread, which provides what may be the most important stimulus from the Fed's aggressive
rate-cutting. The Fed manipulates the so-called federal funds rate, the interest that banks and other financial
institutions pay to borrow money from each other for the short term. These borrowings are then lent to companies
and individuals. With the federal funds rate now at 2 percent, down from 6.5 percent on Jan. 1, the nation's lenders
have plenty of incentive to borrow short term at 2 percent and to lend long term at 4.5 percent or higher.
Mortgages offer a particularly juicy spread, and if potential customers hesitate — because they are nervous about
their jobs and about home prices — then lenders can lure them by lowering mortgage rates a few more notches
while still reaping an adequate spread. With the federal funds rate at its current level, the 30-year mortgage can go
as low as 4 or 4.5 percent, in the view of Albert Wojnilower, a Wall Street economist.
Like many forecasters, Mr. Wojnilower expects the economy to rebound by next summer. The Fed's rate-cutting
will help to make that happen, he and others say. But there are two areas where monetary policy normally works to lift the economy out of hard times, yet is not working now.
Businesses usually take advantage of falling rates to step up investment. That spending normally gives the economy a powerful lift. But in this recession, there is so much excess capacity, thanks to the excesses of the 1990's, that companies resist. They fail to see a gain in profits from new investment, no matter how cheap credit gets. And the shock from the bursting of the high-tech bubble makes everyone a wary and reluctant borrower.
The Federal Reserve, in sum, lacks the power this time to lift America out of recession. Help is essential — from government spending or lower oil prices or some wondrous new technology or economic revival abroad. And soon, before the federal funds rate gets to zero.
Copyright 2001 The New York Times Company |
