Economists worried that Fed move will be too late
-Nasdaq hits lowest level in more than a year
Dec 19, 2000
By Janet Kidd Stewart
Chicago Tribune Staff Writer
Published December 19, 2000 9:08 PM CST
The Federal Reserve left interest rates unchanged Tuesday but did an about-face on its outlook on the economy, suggesting that the risk of a sharp slowdown now outweighed the risk of inflation.
After raising rates six times in less than a year to slow the sizzling economy and keep inflation in check, the Fed may have done its job too well, some experts fear, and could well be setting the stage to cut rates early next year to reignite growth.
The statement issued after Tuesday's meeting never uses the word "recession," but that was the one foremost in many economists' minds. Some say the Fed's reversal from inflation as its paramount concern suggested the economy is in worse shape than previously believed, while others say the lack of a rate cut Tuesday meant the situation isn't dire enough to require a dramatic move.
To some experts, however, it's too late for caution.
With corporate profits eroding and more and more big-name companies announcing thousands of job cuts in recent weeks, many analysts say the Fed's much-desired "soft landing" of slowing growth to more sustainable levels may be in peril.
Manufacturers, in particular, have been vocal about the need for a rate cut, saying portions of the sector are already in recession. Some economists say even a cut in January -- no sure thing -- may be too little, too late.
"The next Fed meeting is six weeks away, and rate cuts don't have an immediate impact," said Alan Skrainka, chief market strategist at Edward D. Jones, the Dow Jones News Service reported.
The uncertain prospects did little to comfort investors.
Battered technology stocks continued to fall, sinking after the Fed's announcement to their lowest level in 16 months.
The tech-heavy Nasdaq composite index lost 112.81 points, or 4.3 percent, to 2511.71. It was the sixth consecutive drop for the index, leaving it more than 50 percent below its all-time high set in March.
The Dow Jones industrial average also faltered, failing to hold onto a triple-digit gain and closing down 61.05 points, to 10584.37.
Stocks rallied on Monday as speculators hoped that policy-makers would surprise analysts and cut rates Tuesday.
The Fed said Tuesday "there is likely to be a post-Christmas credit market sale, but the market was hoping for a pre-Christmas sale," said Paul Kasriel, a Northern Trust economist in Chicago. "Barring an unforeseen rapid rebound in the economy or in inflation, the Fed is most likely going to cut rates on Jan. 31."
That's the next meeting of the Federal Open Market Committee, when Kasriel said he expects a quarter-point reduction, and possibly even a half-point cut.
Although experts are unsure about where the economy is heading, many consumers are still confident about its prospects.
Shopping along Chicago's Michigan Avenue on Tuesday shortly before the Fed announcement, attorney Bruce Howard said that as a father of three he had limited ability to cut back too much this year. "We are trying to be a little more reasonable," he said.
Cab company executive Jan Johns also said she's not cutting back.
"I've got great confidence in this economy, and in (President-elect) Bush," she said, toting a few shopping bags.
Economists, however, have expressed concern about the all-important holiday sales season. Retailers have been expecting slower sales, and have begun discounting goods before Christmas.
Consumer spending has been a prime driver in the economy's record-setting expansion over the past decade, but at their meeting Tuesday, Fed policy-makers noted a rapid slowdown in the economy as they left the key federal funds overnight bank lending rate at 6.5 percent.
"The drag on demand and profits from rising energy costs, as well as eroding consumer confidence, reports of substantial shortfalls in sales and earnings, and stress in some segments of the financial markets suggest that economic growth may be slowing further," the committee said in a statement after the meeting.
Broad-based profit warnings have plagued the equities market in recent weeks, and spotty layoffs and production slowdowns are creeping into the once-hot American economic engine.
"There's been $3.8 trillion in market capitalization that has evaporated since March, so somebody's hurting," Kasriel said.
Nonetheless, signs of a slowdown seem to appear daily.
The U.S. trade deficit narrowed to $33.18 billion in October from a record $33.74 billion the previous month, the government reported Tuesday, but was still the second-highest level on record.
Imports fell to $124.42 billion, a 1.6 percent decline from $126.4 billion in September. Exports also fell, declining 1.5 percent to $91.23 billion.
Americans and U.S. companies bought fewer foreign cars, industrial supplies, food and capital goods such as semiconductors, the government said.
In addition, the housing market, a bedrock of the current expansion, is showing signs of fatigue, as a survey of homebuilders' expectations sank.
Despite those signals, oil prices remain high and Fed officials could still be trying to wring any remaining exuberance out of the stock market, said Jay Mueller, chief economist for Strong Investments in Milwaukee.
One bright note on the horizon could be the Bush campaign's pledge to cut taxes, Mueller said. If he could manage the cut politically, he said, the move would strengthen the economy without sparking inflation.
"In any case, that's not our worst problem now," he said. "We're definitely in danger of slipping into a hard landing."
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