Trez yield drops, US economy resembles Japan more & more /jw
agree - more talk of lowering rates is consistent with that view.
Tony Crescenzi
Should Fed Cut?
8/02/02 02:16 PM ET
Aaron, as I state in my earlier note, the Fed should cut rates if it appears that there is risk that the inflation rate will fall below the 1.75% fed-funds rate. Recent economic data certainly raises that risk. The recent decline in the stock market has had an enormous impact on the performance of the economy, creating risks that did not previously exist. Roughly $4 trillion of wealth has been erased since the end of March. Studies indicate that consumer spending will decline about 4 cents for each $1 decline in equity wealth. This means that consumer spending will be cut about $160 billion in the quarters ahead. Offsetting this are the positive wealth effects from the housing market, which are roughly double that of the equity market, and a robust pace of mortgage refinancing. Perhaps more important than the math is the psychological toll that the stock market's decline will have on businesses, which were already in a cautious mode. And it could worsen perceptions abroad about the U.S. economy, and this reduce foreign investment still-further. The long-term positives remain good (low inventories, strong productivity growth, low interest rates, low inflation) but are at risk of being dwarfed by a variety of negatives, especially the weak stock market.
All of this said, it is important to note that where the Fed's interest rate cuts can have impact, they've already had substantial impact--chiefly in housing and in the auto sector. With automobile manufacturers already offering zero-interest financing, another Fed rate cut would have questionable impact in this sector. The same can be said about housing markets, where interest rates are already exerting substantial impact.
Similarly, given the poor response in the stock market to the Fed's past eleven rate cuts, it's clear that rate cuts are no panacea. The problems in the stock market have nothing to do with current interest rate levels.
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