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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Madarasz who wrote (4388)	8/21/2001 2:10:00 PM
From: John Pitera	Read Replies (1) \| Respond to of 33421

Mr B...explains Mr. G -- Fed Expected to Cut Rates a Quarter-Point Again By John M. Berry Washington Post Staff Writer Tuesday, August 21, 2001; Page E01 Federal Reserve officials have said little in public recently, but there is little doubt they are poised to cut short-term interest rates again when they meet today, in an effort to boost the sputtering U.S. economy. Many investors and analysts expect the Fed to lower its target for overnight rates by another quarter-point today, to 3.5 percent. That would be the Fed's seventh rate cut of the year, for a total reduction of 3 percentage points in less than nine months. "Fed officials still confront a relatively weak U.S. economy," said economist Robert V. DiClemente of Salomon Smith Barney Inc. in New York. "Growth stalled out completely this spring and appears to be just inching ahead this summer." DiClemente said it is "too soon for [Fed policymakers] to invite speculation" that they will stop lowering rates soon. But they will likely keep to "a diet of quarter-point moves" rather than half-point cuts, he said, because the economy should be increasingly benefiting from the effects of the six earlier reductions. "The United States remains on track for a long stint of relatively low short-term interest rates," DiClemente said. Interest rate changes always affect the economy with a distinct lag, and the earlier Fed rate reductions have yet to revive growth. However, many analysts and policymakers believe the cumulative impact of the rate cuts, coupled with the income tax rebate checks being mailed to millions of households and the passage of time, will get economic growth moving upward again before the end of the year. Several recent economic reports have reinforced some analysts' belief that a rebound is in the offing. "We are increasingly optimistic that gross domestic product growth will start to revive in the third quarter," Macroeconomic Advisers, a St. Louis forecasting firm, told its clients yesterday. "Newfound strength in retail sales was the primary factor last week that convinced us to revise up from 1.9 percent to 2.2 percent our forecast of third-quarter GDP growth [at an annual rate]. We forecast GDP growth of 3 percent in the fourth quarter." Fed officials generally continue to expect growth to pick up in coming months, though a number question whether that acceleration will be as swift as the Macroeconomic Advisers' forecast. The latest staff forecast at the San Francisco Federal Reserve Bank calls for the economy to grow at just above a 1 percent annual rate this quarter, at around a 2 percent annual rate in the fourth quarter and at up to a 3 percent annual rate in the first half of next year. Some Fed officials think even those figures could be optimistic. Early this year, Fed Chairman Alan Greenspan said he was worried that consumer confidence would be "breached," causing a major drop in household spending, which is the mainstay of the economy. In congressional testimony last month, the Fed chairman said that has not happened and that he is "far less concerned today" that it will. One solid piece of good news has been the large drop in energy prices, which has lowered business costs and left consumers with more money to spend on other things. Another factor behind Macroeconomic Advisers' optimism is the very rapid rate at which manufacturers have been shedding the unsold goods that built up last year after business and consumer demand slowed abruptly. Production cuts intended to reduce the unwanted inventories have been a key element in the economy's struggle to stay out of a recession. Many companies also found themselves with unneeded production capacity when demand faltered because of the investment they had made in new plants and equipment during the late 1990s, particularly in high-tech equipment. Business executives, faced with sharply falling profits, have responded by cutting costs. This has included laying off workers and slashing spending on new plants and equipment. One reason why Fed officials appear likely to stick with quarter-percentage-point, rather than half-point, cuts for now is that they believe businesses need time to work off their excess inventories and absorb their unneeded production capacity, processes that likely would not be accelerated by bigger cuts. Bill Dudley, chief U.S. economist at Goldman Sachs Group Inc. in New York, is among those betting on a quarter-point cut today. A half-percentage-point cut "seems unlikely given recent economic news that the economy may be stabilizing and the fact that Fed officials shifted" from a series of half-point cuts to a quarter-point cut at their June meeting. He also said the Fed is unlikely to leave rates unchanged "given the weakness in the equity market and the improvement in the inflation outlook." Dudley said the Fed's chief policymaking group, the Federal Open Market Committee, also is likely to say it continues to believe that the risks of weak growth are greater than the danger that inflation will accelerate.