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Strategies & Market Trends : Love shack -- Ignore unavailable to you. Want to Upgrade?

To: Grandk who wrote (219)	12/20/2000 3:30:53 AM
From: Grandk	Respond to of 322

Fed Warns Economy May Be Slowing Too Fast Reuters Photo By Caren Bohan WASHINGTON (Reuters) - Federal Reserve policymakers kept interest rates steady but warned the economy may be slowing too abruptly, signaling they could cut rates early in the new year. Feeding on negative economic sentiment and disappointment that the Fed did not deliver a rate cut, stock markets tumbled with the Nasdaq falling to its lowest point this year. Highlighting how swiftly the economic mood has soured, the policy-setting Federal Open Market Committee staged a dramatic shift Tuesday from its 11-month-old position that inflation posed the main risk to the record U.S. expansion. The FOMC will gather again on Jan. 30-31 and many analysts said there was a good chance it could trim rates then -- or, if the interim economic data were worrisome enough, it could take the unusual step of cutting rates in between meetings. In a CBS News interview conducted on Monday before the Fed meeting but released late on Tuesday, President Clinton (news - web sites) made a rare comment on rates, saying the central bank should consider whether to lower borrowing costs. ``If the Federal Reserve believes that the economy is slowing too much, they might want to cut short term rates again, and try to get a little more investment going,'' Clinton said. Asked if he favored cutting rates now, Clinton said he did not wish to break his policy of not commenting on the Fed and added: ``The press indicates that they have that under advisement, that they're thinking about it. And it's something I think they ought to think about.'' However, earlier on Tuesday, Clinton said he did not believe the United States was headed for a recession -- strictly defined as two quarters of contraction -- as President-elect George W. Bush (news - web sites) and his Vice President-elect Dick Cheney (news - web sites) have warned could be looming. Although the Fed's language indicated that borrowing costs were likely to fall as early as the FOMC's first meeting next year, a January rate cut was not soon enough for stock traders who had clung to the hope that one would come on Tuesday. The Dow Jones industrial average gave back a rally of 139 points and ended down unofficially 61.05 points, or 0.57 percent, at 10,584.37 while the Nasdaq composite index dropped more than 4 percent, or nearly 113 points, to finish at 2,511.70. Like the Nasdaq, the Standard & Poor's 500 index also hit a 2000 closing low. Traders said fears on Wall Street were growing that a too-swift economic cooling could lead to a nasty downturn. The Fed said higher energy costs were putting a damper on consumer and business confidence. It also cited weaker-than-expected corporate earnings and ``stress in some segments of the financial markets'' as reasons for concern that the economy could soften further. ``While some inflation risks persist, they are diminished by the more moderate pace of economic activity,'' the panel said. ''The committee will continue to monitor closely the evolving economic situation.'' The Fed kept its federal funds overnight bank lending rate at 6.5 percent for now, where it has been since a half-percentage point increase in May. The more symbolic discount rate on Fed loans to banks remains at 6.0 percent. Slowdown Risks Extensive ``I think the statement suggests that the risks of the economy weakening are extensive,'' said Marc Wanshel, financial economist at J.P. Morgan in New York. ``They didn't view the situation as dire enough for them to make a rate cut right now. But certainly, I think they have laid a clear path to move at the next meeting.'' The language about ``monitoring'' the economic situation left the door open for an inter-meeting move, economists said. But they stressed the Fed would not take such action unless the situation became very serious. ``Everywhere you look, there are signs of a decelerating economy,'' said Greg Valliere, managing director at Schwab Washington Research. He pointed to sliding stock prices and a buildup of inventories by business suddenly faced with softer consumer demand. The statement emphasizing the risk of economic weakness was the middle course of three possible ways the Fed could have indicated its concern about the economy. A cut in rates was another option that the central bank surely weighed and would have been the boldest step. A third option would have been for the Fed to issue a statement saying the economic risks were ``equally balanced'' between inflation and economic weakness. While that would have abandoned the view, held since February, that inflation was the biggest threat to the record economic expansion, it would not have sent as loud a signal of concern as the statement the Fed issued. Swift Reversal Just six months ago, Fed officials had been worried that the nearly 10-year-old economic expansion, the longest in history, was on a course toward overheating. They bumped up interest rates six times between mid-1999 and May of this year in the face of an economy that was growing by leaps and bounds. Policymakers initially welcomed the signs the economy was slowing, believing it was shifting to a more sustainable and healthy pace of expansion. But in recent weeks, evidence of a rapid slowdown has been mounting, with consumer confidence tumbling, industrial output slumping and early reports that Christmas sales are less than robust.