Many economists believe 11th Fed rate cut will be the last

Wednesday, December 12th 2001, 12:00 am
By: News On 6

WASHINGTON (AP) _ With the Federal Reserve driving a key interest rate to its lowest level since John F. Kennedy was president, many analysts are betting that the central bank has finally reached the end of its aggressive credit easing.

The fed cut interest rates for an 11th time, and signaled on Tuesday that it was prepared to cut even further if necessary.

``With a little bit of luck, this will probably be the last rate cut the Fed will have to implement in this cycle,'' said Mark Zandi, chief economist at ``I think the Fed senses the economy is finding a bottom and will begin to turn upward by early next year.''

Part of the reason for that opinion is the fact that the central bank, which had cut rates by a half-point on three separate occasions since Sept. 11, felt the need this time around for only a quarter-point reduction in the federal funds rate, pushing it down to 1.75 percent.

Also, analysts said they detected a more positive tone in the Fed's brief statement announcing its decision.

In its statement, the Fed said that ``weakness in demand shows signs of abating'' although it cautioned that as of yet those signs remained ``preliminary and tentative.''

Joel Naroff, chief economist of a Holland, Pa., consulting firm, said the Fed seemed to be saying ``if the data that come out before the Jan. 29-30 meeting continue to point to demand rebounding, they will not have reason to cut anymore.''

The Fed left the door open for further rate cuts by saying that the threats to the economy going forward remained weighted to economic weakness rather than higher inflation. In fact, the central bank noted that the already low inflation rate was ``likely to edge lower'' in coming months because of the economic downturn.

Some economists said they still believed one more quarter-point rate cut was possible at the central bank's January meeting, if for no other reason than it would represent an insurance policy that the economy will have more momentum when it emerges next year from its first recession in a decade.

Martin Regalia, chief economist at the U.S. Chamber of Commerce, said he expected the economy, which shrank at an annual rate of 1.1 percent in the July-September quarter, was shrinking at a 2 percent rate in the current quarter.

The Fed's latest action pushed its target for the federal funds rate, the interest that banks charge each other, down to 1.75 percent, the lowest level since July 1961. The Fed also reduced its discount rate, the interest it charges to lend money directly to banks, by a quarter-point to 1.25 percent, the lowest level on record.

Commercial banks immediately matched the Fed's rate reductions by lowering their prime lending rate, the benchmark rate for millions of consumer and business loans, to 4.75 percent, the lowest level since November 1965. The changes in the prime rate were to take effect Wednesday.

In addition to easier credit from the Fed, President Bush is urging Congress to pass an economic stimulus bill which has been stalled in Congress because of Democratic objections that it favored the wealthy.

In an effort to break the stalemate, the administration put forward some compromise proposals on Tuesday to boost the amounts in the package aimed at low income workers and the unemployed.

David Jones, chief economist at Aubrey G. Lanston & Co., said that if Congress does pass a stimulus package before Christmas and the economy shows further signs of stabilizing, the Fed will leave rates unchanged at its January meeting.

``I would not completely rule out another quarter-point rate cut, but the odds are 50 percent or less that it will happen,'' Jones said.

Beginning last Jan. 3, the Fed has reduced its target for the federal funds rate by 4.75 percentage points, the largest reduction in a single year since the Fed slashed the funds rate by 6.7 percentage points in 1981 as it battled the country's worst recession since the Great Depression.

David Wyss, chief economist at Standard & Poor's in New York, said the Fed felt the need to leave the door open for further cuts because of the great downside risks still facing the economy such as another terrorist attack or the threat of a disruption in oil supplies if the war in Afghanistan spreads to other countries in the Middle East.

``Given the terrorist threat that is still out there, the chances of something going wrong remains high,'' Wyss said.