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To: Mark Fowler who wrote (114195)	1/4/2001 2:57:36 AM
From: H James Morris	Respond to of 164684

I have no idea about what? I probably have less idea about what I'm doing than Uncle Al! >Editorial comment: Greenspan takes action Published: January 3 2001 20:04GMT \| Last Updated: January 3 2001 20:10GMT The Federal Reserve's decision to cut interest rates by half a percentage point was almost certainly the right thing to do in Thursday's increasingly gloomy circumstances for the US economy. Yet it also shows how wrong even this august institution was about the state of the economy only a few weeks ago. It may fail to end the gathering panic about the health of the "new economy". It could even confirm it instead. The speed with which the mood has changed is extraordinary. In October, Goldman Sachs, one of Wall Street's more respected mainstream forecasters, thought growth would be 4 per cent in 2001. In December, that was cut to 2.5 per cent. Now, in its last publication of 2000, it asks: "Is the US economy in recession?" Recessions are almost always unexpected. If foreseen, the monetary authorities would have tried to forestall them. In this case, however, the central bank has been caught more than usually unawares. The Federal Reserve started December with a bias towards tightening its monetary policy. This was shifted to a bias towards easing only on December 19. Now, two weeks later, the Federal Reserve has acted. Swift response This rapid shift in view may not be good for Alan Greenspan's reputation for infallibility but it indicates something more important - his ability to respond swiftly to events. As the Fed remarked in yesterday's press release, its action was taken "in light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets, and high energy prices sapping household and business purchasing power. Moreover, inflation pressures remain contained." All this is at least reasonable, although energy prices are already far below the peaks reached last September. The action does, however, raise two contradictory concerns - inevitably so at a time of rapid changes in economic performance. Too little, too late The first concern is that the Federal Reserve has done too little, too late. A half percentage point cut, to 6 per cent, brings the federal funds rate back to where it was last June. It is still far above the 4.75 per cent in effect for the first half of 1999. While Wall Street reacted with wild enthusiasm on Wednesday, Main Street may fail to react with equal alacrity. The situation is quite unlike that of the autumn of 1998. This time, weakness starts in Main Street and must be eliminated there. Monetary policy has been compared to pulling a brick with a piece of elastic. At first, nothing happens. Then, quite suddenly, it jumps. The same may be happening to the US economy as it responds to the combined impact of the monetary tightening since mid-1999, the stretched condition of private sector finances and the correction in share prices. It may take much more than this cut to persuade the private sector to keep investing and consuming. It is even possible that the cut will make people more nervous, since it demonstrates the degree of concern now felt in the country's most respected institution. The second worry is that the cut will work too well. Buoyed by the conviction that the Federal Reserve will always act to keep the economy moving, stock prices will now soar and the private sector's behaviour will go back to profligacy as usual. If so, the Fed's action may merely postpone a still bigger reckoning later on. At this stage, nobody knows which risk is the greater. That is the nature of economic turning points. But if the Fed was definitely wrong about the risks a month ago and may still be wrong today, it has at least shown its usual flexibility. That is all one can hope for. No central bank is infallible. But this one does at least learn quickly from its errors.