Another rate cut or two may be needed to restore confidence
By Dr. Irwin Kellner, CBS MarketWatch.com
Last Update: 9:31 AM ET Mar 1, 2002
NEW YORK (CBS.MW) -- Listening this week to Federal Reserve Chairman Alan Greenspan's view of the economic outlook was like déjà vu all over again, except that he referred to crosscurrents affecting the recovery, rather than headwinds.
Ten years ago, the buzzword at the Fed was "headwinds." The central bank expected that the recovery from the 1990-91 recession would not be as rigorous as in past cycles due to a number of forces acting to slow it down.
This time the words are different but their meaning is the same.
The Fed head thinks that a number of unusual factors will keep the recovery subdued. "An array of influences unique to this business cycle seems likely to moderate the speed of the anticipated recovery," Mr. Greenspan told Congress. See full story.
To be sure, the factors that the Fed thinks will slow this recovery are different from those that were expected to retard the speed of the last expansion. But the message is the same: a slow recovery means the Fed will keep its finger off the interest rate trigger for longer than the markets think.
The recovery from the 1990-91 recession was held back by declining defense spending, the overhang of real estate, huge private-sector debt loads, no room for fiscal stimulus because of Washington's soaring budget deficit, and diminished export prospects.
As a consequence, the labor market remained weak until the middle of 1992. Employment continued to fall well into the first year of the recovery, while the unemployment rate continued to rise.
Reacting to this, the Fed not only did not raise short-term interest rates at the first sign of recovery, it continued to reduce them until the end of 1993 - almost three years after the recession ended.
The retardants this time around are high household debt, eroded wealth from the drop in the stock market, poor corporate profits and weak capital spending. To this must be added the dour mood of corporate executives.
At its annual spring break in Boca Raton, Fla., the Business Council reported this week that three-quarters of its members believe the U.S. remains in recession. Views like this are understandable, since profits are dismal and selling prices can't be raised.
The problem here is that these attitudes could turn into a self-fulfilling prophecy. If Corporate America thinks times are tough, it won't hire people and it won't spend money on capital goods.
It might take another cut or two in interest rates to give businesspeople the confidence they need to start spending once again. Just like the last time.
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Dr. Irwin Kellner is chief economist for CBS.MarketWatch.com and is the Weller professor of economics at Hofstra University. |
