John Berry of the Post, probably the best of the Fed reporters, had this to say today:
Greenspan Surprised Even Colleagues
By John M. Berry
Washington Post Staff Writer
Friday, January 12, 2001; Page E01
Federal Reserve Chairman Alan Greenspan shocked investors, analysts and even many of his colleagues at the central bank last week when he urged an aggressive half-point cut in short-term interest rates.
Now investors are looking for another half-point cut on Jan. 31 at the end of the next meeting of the Fed's top policymaking group, the Federal Open Market Committee.
Should Greenspan push for another half-point rate reduction at the end of the month, he will get it, but currently some officials apparently would prefer the more usual quarter-point step.
The very weak economic news likely to be released in coming days, such as a decline in December retail sales (expected today) and in December industrial production (out next week), were already anticipated when rates were cut last week.
Furthermore, while they fully expect weak -- perhaps even quite weak -- economic growth for January through March, few if any Fed officials are expecting a recession in the coming months.
But some Fed officials are concerned that the more gloomy predictions of some private forecasters are conditioning financial markets to anticipate cumulative rate cuts of 2 or 21/2 percentage points this year in the Fed's target for overnight rates, which is more than the officials think will be needed. Of course, if the economy deteriorates more than the officials expect, more rate cuts could occur.
One indication that the FOMC action last week surprised some Fed officials appeared in the public statement that followed. The Fed board separately said it was approving a quarter-percentage-point reduction in the discount rate, the rate the reserve banks charge financial institutions on direct loans. The board can change the discount rate only at the request of the board of directors of a Federal Reserve bank.
So on Jan. 3, the requests from seven of the 12 banks were approved. That meant that the boards of the other five reserve banks, which often reflect the thinking of the bank's president in their discount-rate requests, were not requesting any rate cut. More striking, not a single bank had asked for a half-point cut in the discount rate. But by the end of Jan. 4, in response to the Fed's statement suggesting it, all 12 banks had sought and received approval for a half-point cut.
At the FOMC's last scheduled meeting on Dec. 19, the members decided to leave rates unchanged but signal that they had shifted their thinking to being more concerned about the abrupt slowing of growth than about the possibility that inflation would rise. Some of the officials apparently had hoped the shift would give heart to investors and help stop the slide in stock prices and bolster consumers' sagging spirits. But the market reaction indicated that many investors were disappointed the Fed hadn't cut rates.
By Jan. 2, the first day of stock and bond trading in the new year, there was no sign that the sour mood of the markets had improved while retailers reported weak holiday sales. The Nasdaq composite index, which features mostly high-tech stocks, plummeted more than 7 percent that day.
Nevertheless, the presidents of the 12 regional Federal Reserve banks, who participate in FOMC sessions, were completely surprised to receive word that the chairman wanted to convene a conference call meeting of the committee the following morning. Presumably Greenspan and the other four members of the Fed's board here in Washington discussed the matter at a board meeting early Jan. 2.
By the conclusion of the call the next day, the surprises for some officials included the timing of the move, the size of the rate cut and the negative tone of the announcement issued afterward: "These actions were 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."
Speculation is rife throughout the Fed, as well as throughout markets, as to what caused Greenspan to decide a big rate cut was needed so urgently. It was the first time anyone there can remember that the Fed had begun a cycle of cutting rates with a move other than at a regular FOMC meeting, and it was the first time in Greenspan's 13-plus years as chairman that a first step was more than a quarter-percentage point.
The FOMC announcement cited plenty of problems, of course. One of them, weakening production, was highlighted Jan. 2 by the release of the December reading of the National Association of Purchasing Management, which tracks conditions in the manufacturing portion of the economy. The association's index fell last month to a level indicating a sharp contraction in manufacturing, a level that historically had been reached only when the overall economy had virtually stopped growing.
Then at 8:30 a.m. Jan. 3, Greenspan received figures from the Bureau of Labor Statistics showing a large drop in manufacturing, mining and utility payrolls and hours worked for December.
Meanwhile, business executives around the country -- and especially those from the big financial firms on Wall Street -- had been bombarding Greenspan and other Fed officials with anecdotes about how bad the economic outlook had become for their companies, their industries and the financial markets.
Some Fed watchers have speculated about the possibility that President-elect Bush may have pressured the chairman to cut rates when they met the day before the December FOMC meeting. And some analysts have suggested that the Fed's move was influenced by the chaos in California's deregulated electricity market, in which the state's two heavily indebted major utilities are hovering on the brink of bankruptcy -- failures that could cost lenders billions of dollars. Greenspan was among the public officials consulted by California Gov. Gray Davis (D) late last month about finding a way out of the mess.
But to close observers of Greenspan and the Fed, pressure from Bush appears unlikely to have been a factor. And lower interest rates simply would not make any significant difference in the California situation, according to experts following that situation.
Even now, as some forecasters are warning that a recession is likely, Fed officials generally do not think the situation is that dire. For instance, two presidents of regional Federal Reserve banks, Cathy E. Minehan in Boston and Jack Guynn in Atlanta, made speeches this week predicting moderate U.S. economic growth of 2 percent to 3 percent this year.
"Through mid-December, my own sense was that the economy might be approaching just the so-called 'soft landing' so often discussed in the media, although with a growing measure of downside risk," Minehan told a Chamber of Commerce audience in Massachusetts Wednesday. "I continue to believe moderate growth for the coming year as a whole is the most likely outcome, but in recent weeks those risks have become more evident. Under these circumstances, the FOMC decided that it was prudent to lower its target."
© 2001 The Washington Post Company |
