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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: habitrail who wrote (4273)	8/10/2002 12:30:32 PM
From: Jim Willie CB	Respond to of 89467

Decision time for Greenspan Tepid economy may force Federal Reserve to cut rates again soon, experts say Sam Zuckerman, Chronicle Economics Writer Thursday, August 8, 2002 With the stock market in a swoon and the economy once again perilously close to recession, the Federal Reserve is getting ready to resume last year's campaign to cut interest rates, some forecasters now say. Most Fed watchers still expect Chairman Alan Greenspan and his colleagues to hold rates steady for the rest of 2002. But a growing number of experts predict that new threats to the economy will force the central bank chieftain to wield his shears again. What changed the outlook was a summer that has been nothing short of dreadful, with stocks plunging and data showing the much-heralded economic recovery all but stalled out. Most shocking was the federal government's estimate that the economy grew at a feeble 1.1 percent pace from April through June, down from 5 percent in the first quarter, a sharp slowdown that raises the possibility of a renewed dip into negative territory in the months ahead. "When you look at all the figures, you start to get pretty worried," said Joseph LaVorgna, an economist with Germany's Deutsche Bank in New York. "The only saving grace will be more Fed cuts." Fed policymakers are scheduled to meet on Tuesday, but LaVorgna doesn't expect them to trim rates then unless stocks resume their downward course. By the end of the year, though, the Fed will have slashed its benchmark short- term interest rate to 1.25 percent from the current 1.75 percent, LaVorgna predicts. Some experts expect the Fed to tip its hand next week by issuing a statement stressing that weakness, not renewed inflation, represents the gravest hazard to the economy. Right now, the central bank officially reckons both to be equal dangers. A formal statement emphasizing economic weakness often precedes rate cuts. "Next week, they will signal the world that they are aware the risks have changed," said former Federal Reserve Governor Lyle Gramley, now an economic adviser to Charles Schwab Corp. Although the Fed directly controls only short-term rates, its cuts usually make it cheaper for consumers and businesses to borrow for longer periods as well, thereby boosting the economy. Last year, in a bid to arrest an economic slide, the Fed trimmed the cost of money 11 times, bringing its benchmark rate to a four-decade low. Those cuts spurred record sales of homes and cars, helping pull the economy out of recession even as business spending plunged and most of corporate America suffered its worst profit drought in decades. When the economy was expanding again early in 2002, the Fed halted its rate- cutting campaign. The smart money was betting that the central bank's next move would be to raise rates as recovery took hold. That optimistic scenario has been cast aside by falling stock prices, slowing retail spending and the failure of the slumping business sector to turn around. The result is a recovery that appears to be melting away, leaving businesses languishing and unemployment at high levels. "We haven't seen any pickup. There never was a recovery," said Patrick Garrehy, chief executive of Relevant Business Systems, a San Ramon maker of software for manufacturers. The company's sales have fallen about 25 percent from its levels of the late 1990s. "I've been in the business 20 years, and I've never seen such a slowdown as this," he said. "We call on manufacturing companies all the time, and there is still a lot of uncertainty out there." The Fed is not supposed to set policy based on the ups and downs of the stock market. But the big worry now is that falling share prices will undermine already weak confidence, prompting households and businesses to rein in spending. Such concerns give the Fed license to take stock prices into account when it sets policy. New figures show that consumers continued to rack up debt in June. But recent surveys indicate that ordinary Americans have become increasingly worried about the economy, which may be contributing to a slowdown in retail sales growth. The Fed's medicine does its magic by stimulating those sectors of the economy that are sensitive to interest rates, especially purchases of big- ticket items. Auto companies have taken advantage of low rates by renewing their no- and low-interest financing offers, moving vehicles off the lots at a fast pace. And new mortgages and refinancings are continuing at a record pace, boosting home sales and putting cash in the hands of consumers. Additional rate cuts would keep auto and home sales at high levels. But some experts fear that the Fed could be dealing with the collapse of the stock market bubble by creating another bubble -- an unsustainable rise in home prices. "The lowest mortgage rates on record are helping to prop up the U.S. economy," said John Lonski, chief economist at Moody's Investors Service. "But this could come back to haunt the Fed. They very much run the risk of inadvertently inflating a housing bubble." -end-