FORMER FED GOV. LINDSEY: FED RATE CUT WON'T HELP; FED ON HOLD
By Steven K. Beckner
ÿÿÿÿÿMarket News International - As another day of market volatility bred continued speculation about an emergency easing of monetary policy, sources at the Federal Reserve betrayed no sense of panic and no immediate inclination to cut short-term interest rates.
ÿÿÿÿÿThe Fed was keeping a close eye on the financial markets, and consultations were going on at various levels, but so far the attitude among policymakers continues to be one of "wait and see," sources said. The impact of recent events on domestic demand, which up until now has been strong, remains open to question, they said.
ÿÿÿÿÿAs Market News reported over the weekend from Jackson Hole, Fed policymakers are less inclined to tighten than they were just a couple of weeks ago at the Federal Open Market Committee meeting, but not yet ready to ease, and this view does not seem to have changed much in wake of Monday's near 513-point drop in the Dow Jones Industrial Average.
ÿÿÿÿÿFormer Fed Governor Lawrence Lindsey said cutting the federal funds rate would do little to help financial problems abroad and said it's "too early to tell" whether the U.S. economy needs an easier Fed credit stance.
ÿÿÿÿÿMeanwhile, the National Association of Purchasing Management reported a small bob up in its index of industrial activity, but analysts attached less significance to that than they would have prior to the recent plunge in the stock market. Some saw underlying weakness.
ÿÿÿÿÿFed Chairman Alan Greenspan huddled with various Fed presidents and governors, as well as senior staffers, over the weekend in Jackson Hole. Since then Greenspan, from California, has continued to stay in close touch with his Fed colleagues, as well as with Treasury Secretary Robert Rubin. Senior staff in Washington and New York have been closely watching market developments and keeping policymakers apprised.
ÿÿÿÿÿHowever, there has been no formal "crisis meeting" of the FOMC, sources indicate. The FOMC is not scheduled to meet again until Sept. 29.
ÿÿÿÿÿFollowing Monday's 512.61 point, 6.4% drop in the Dow, which followed a 471-point cumulative drop on Thursday and Friday, stocks opened higher Tuesday, before retreating, then rebounding again. But an air of relative calm, albeit alert, seems to have prevailed at the Fed.
ÿÿÿÿÿThis is not 1987, when the Dow fell more than 20% on a single day, Fed sources emphasized. For one thing, they noted, the financial markets are functioning much smoother at high volumes of trading with no clearing or settlement problems and no major credit exposures developing. For another, they add, the financial system generally is much healthier, with financial institutions better capitalized and with far fewer bad loan problems -- something that cannot be said of banks in Japan and elsewhere.
ÿÿÿÿÿBesides, Fed sources pointed out, the Fed has been anticipating, if not hoping for, a stock market correction from excessive levels.
ÿÿÿÿÿAnd the underlying U.S. economy is strong, despite weakened exports and inventory corrections, Fed sources note. They said it is too early to conclude that the market dip will have a sharp slowing effect on consumption and investment. They said the Fed will have to watch and wait to see the impact on domestic demand.
ÿÿÿÿÿThe clear message from well-informed Fed sources was that talk of easing remains premature.
ÿÿÿÿÿLindsey, in an interview from his office at the American Enterprise Institute, said, "What we have is a financial unwinding globally, but it's not clear that cutting the funds rate is an efficient way of putting money into the global financial system."
ÿÿÿÿÿAs for the impact of the market sell-off on the domestic economy, "it's too early to tell," said Lindsey, who predicted the Fed will remain on hold and wait to see what the impact is.
ÿÿÿÿÿSt. Louis Fed President William Poole told Market News Friday the Fed would "follow rates down" if incoming economic data confirm that "the markets is correct in its judment now that the dangers are primarily on the downside." But he said he was not prepared to conclude that easing will be necessary. His view was echoed in interviews with a host of other Fed officials attending the Jackson Hole conference, and sources suggest little has changed since then.
ÿÿÿÿÿThe NAPM announced that, in August, its manufacturing index rose from 49.1 to 49.4, still below the break-even 50 level, as production rose from 49.2 to 50.3, but new orders dipped from 53.2 to 50.9. The employment index rebounded from 44.4 to 46.9.
ÿÿÿÿÿMickey Levy, chief economist for NationsBank Montgomery Securities, said the NAPM report was "a touch on the weak side insofar as it doesn't seem to pick up the return of workers to GM."
ÿÿÿÿÿMore important, says Levy, is the prospective impact of market developments on personal and business spending. He said "people are overstating the wealth effect. The economy is strong."
ÿÿÿÿÿ"There is no question the Asian crisis and the decline in the stock maket is going to have a negative effect on consumption and investment, but the economy is so sound," Levy continued. "You're coming off a first half where consumption grew 6%, and business fixed investment 16%. Even if that's cut in half you still have an economy expanding at a slower pace, but I don't see the need to panic."
ÿÿÿÿÿLevy said he does not foresee a downturn. "Every recession in the past has been generated by the Fed raising interest ratess, slowing money growth and reducing demand," he said, but this time monetary policy has remained unchanged, money growth has been strong and market rates have fallen. So "there is no reason to expect a sustained decline in demand."
ÿÿÿÿÿ"There is no reason at all for the Fed to ease," said Levy, adding that Fed easing "would do more harm than good." Among other things, he said a rate cut would take pressure off of Japan to make needed banking reforms and pump liquidity into its financial system.
ÿÿÿÿÿOthers, such as Bryan Wesbury of Griffin, Kubik, Stephens & Thompson, Inc., counter that the Fed has been running an excessively tight policy and should have eased long ago.
ÿÿÿÿÿ** Market News International Washington Bureau (202)371-2121 **
11:46 EDT 09/01
c 1998 Market News Service, Inc.
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