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Fed moves again to hold off recession
By HELEN HUNTLEY © St. Petersburg Times, published February 1, 2001 The Federal Reserve Board cut short-term interest rates another half percentage point Wednesday, trying to stave off a recession that appears more threatening with practically every new economic report. The Fed explained its move with this gloomy diagnosis of the problem: "Consumer and business confidence has eroded further, exacerbated by rising energy costs that continue to drain consumer purchasing power and press on business profit margins." The widely expected action brings the federal funds rate -- the interest rate banks charge each other on overnight loans -- to 5.5 percent. Some banks, including Bank of America, responded by lowering their prime rates, a key benchmark they use to set loan rates for both consumers and businesses. Cheaper borrowing makes it possible for consumers to spend and businesses to expand, which is how rate cuts are able to stimulate a flagging economy. But it typically takes months for cuts to have widespread impact. The Fed's half percentage point cut four weeks ago is still working its way through the economy. And many analysts expect Fed Chairman Alan Greenspan will have to cut further to get the economy turned around. Bond investors already anticipate at least another half percentage point cut. "There is no question that the Fed chairman is pulling out all the stops to avoid a major blot on his otherwise shining record," said David Jones, economist with Aubrey G. Lanston & Co. The Commerce Department said Wednesday that while the economy grew during the fourth quarter, it was at the slowest pace in more than five years. And Greenspan said last week that activity in the current quarter is probably "very close to zero." The official definition of a recession is two quarters of economic contraction. "The extent and the suddenness of the slowdown has caught everyone by surprise," said Oscar Gonzalez, an economist with John Hancock Financial Services in Boston. "This isn't a crash, but certainly is a sudden jolt." The fourth quarter numbers show that the nation's gross domestic product, the total value of all goods and services, grew at an annual rate of 1.4 percent, a dramatic slowdown from the 5.6 percent rate in the second quarter. Spending on cars, washing machines and similar big-ticket items fell at an annual rate of 3.4 percent in the fourth quarter, while business investment in new plants and equipment dropped 1.5 percent. "The GDP numbers show a two-tier economy with the manufacturing sector in recession . . . but the rest of the economy holding up reasonably well," said Jerry Jasinowski, president of the National Association of Manufacturers. Scott Brown, chief economist for Raymond James & Associates in St. Petersburg, said the numbers for the first quarter could show the economy contracting. "There's hope that these Fed rate cuts are going to do the trick, but nobody really knows, including the Fed," he said. "The slowdown also means the economy is more sensitive to shocks." He said the power crisis in California not only puts a damper on growth there but could spread to other states, creating further disruptions. "You can't just create electricity out of thin air; there's a real shortage," he said. But Lynn Reaser, chief economist with Banc America Capital Management in St. Louis, is optimistic. She says rate cuts will help restore consumer confidence, currently at a four-year low. "Consumers should believe that policymakers are trying to restart the economic engine," she said. Lower energy prices and the tax cuts President Bush proposes also should help spur spending, she said. "Economic conditions should actually be improving by spring," Reaser said. Rate cuts are widely perceived as good for the stock market, but the market's reaction Wednesday was muted. The Dow Jones Industrial Average gained a mere 6.16 points to close at 10,887.36, while the Nasdaq Composite Index fell 65.62 points to 2,772.73. The rate cut was already built into stock prices, said St. Petersburg money manager Kurt Ulrich of MW Pritchard, Hubble & Herr. "The market has been predicting it, which is why it's been pretty strong over the last two weeks." But he said that he is not convinced that the problems that have weighed the stock market down for the last year are over: "Everybody wants to think that we have an interest rate cut and bingo, everything will be okay, but it doesn't happen that quickly. I don't think I'd be a buyer of the big growth tech stocks. " But history shows that stocks almost always do very well in the year following the beginning of a cycle of interest rate cuts. The two exceptions occurred in the mid 1970s and early 1980s. "Unless the economy is falling into a deep slump or the U.S. is now in the position of Japan, unable to restart the growth engine, the equity market should do well," predicted Bruce Steinberg, chief economist for Merrill Lynch in New York. Clearwater market analyst William I. Ferree Jr. said investor pessimism in the face of falling rates is difficult to understand. "My indicators are very bullish," said Ferree, who publishes the Ferree Market Timer. He said the market's recent advance has been very broad with a lot of money going into smaller stocks. - Information from Times wire services was used in this report.
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