FEDERAL RESERVE CUTS RATES .5%
Byline: Jennifer Weitzman
NEW YORK — In a move to lightly rev the economic engine without making it overheat, the Federal Reserve Wednesday cut key U.S. interest rates by half a percentage point, to 5.5 percent.
The Fed decided it needed to have a “rapid and forceful response of monetary policy.”
The move signaled the Fed would break tradition and react boldly to cushion the economic slowdown.
Following a surprise half-point rate cut Jan. 3, the reduction comes a day after the monthly Consumer Confidence Index plummeted 14 points to its lowest level in four years, mostly on increased fears about the months ahead.
In earlier remarks, Fed chairman Alan Greenspan stressed that consumer confidence levels would serve as a leading indicator of whether the country would move into a recessionary posture after nearly a decade of economic expansion. The Index is critical because consumer spending accounts for about two-thirds of the nation’s economic activity.
Many fear the stock market retreat and the recent wave of layoffs could snowball into a recession.
Still, J.P Morgan Chase’s Jim Glassman, a senior U.S. economist, said the message is “the Fed will do what it has to in short order to figure out how to bounce growth back to its sustainable growth rate, which is between 3.5 and 4 percent.”
Following five years of historically high growth, when gross domestic product (GDP) grew 5 percent or more on an annualized basis, it expanded only 1.8 percent in the second half of last year. The Fed now expects GDP to be flat in the first quarter.
Glassman viewed the move as psychological, serving to encourage business and consumer confidence to come back, which in turn would fuel the economy.
While surprised by January’s 100 basis point cut, Glassman said the Fed’s cuts and hikes are in no way orderly, and have acted to blunt the impact of hikes last May which slowed the economy faster than expected.
In a statement released after a two-day session of the rate-setting Federal Open Market Committee (FOMC), the Fed said it remains open to further rate cuts should the economy continue to deteriorate. The FOMC’s next meeting is scheduled for March 20.
Given that unemployment remains at an all-time low and inflation remains in check, there is some question the cut was even necessary. However, Glassman noted that “retailers are cheering this because, more than anything else, the interest rate cuts are really to boost consumer confidence.”
Conference Board economist Ken Goldstein said the full point drop in interest rates so far in 2001 surprised him, considering that the economy is better now than it was in the fourth quarter. “It is not their job to restore confidence to consumers who are near panic,” he said.
While the first cut caused the market to cheer, today’s expected news was a yawner for stock prices. The Dow Jones Industrials Average edged up 6.16 points, or 0.1 percent, to 10,887.36, while the Nasdaq backtracked 65.62 points, or 2.3 percent, to 2,772.73. Standard & Poor’s Index fell 7.86 points, or 0.6 percent, to 1365.87.