ECONOMISTS believe Fed drawing close to end of credit easing
Wednesday, August 22nd 2001, 12:00 am
By: News On 6
WASHINGTON (AP) _ The Federal Reserve started its campaign to shore up an ailing U.S. economy nearly eight months ago and many economists predict it will still be at the task come October.
These analysts say there is a good chance the central bank will cut rates for an eighth time at its next meeting on Oct. 2. But they also believe that move could be the last one.
``The Fed is saying we are getting closer and closer to the end of the easing cycle,'' said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.
As expected, the central bank on Tuesday reduced the federal funds rate, the interest that banks charge each other, by a quarter-point to 3.5 percent.
Commercial banks immediately followed the move by reducing their prime lending rate by a quarter point to 6.50 percent, the lowest this benchmark lending rate has been in more than seven years.
Wall Street had a sour reaction to the Fed rate cut. The Dow Jones Industrial Average, which had been up as much as 58 points before the midafternoon announcement, ended the day down 145.93 with the technology-heavy Nasdaq composite index and the broad-based Sandard & Poor's 500 index both tumbling to their lowest levels since last April.
The Dow was still losing in early trading Wednesday, down another 15 points. The Nasdaq index managed a 4-point gain in the first hour.
Analysts said the market reaction reflected concern about weak prospects for corporate profits and worries that the central bank is drawing to an end of its rate cuts. Lower interest rates normally help to boost stock prices because they make alternative investments such as bonds less attractive.
``The market is beginning to realize that the economy is not going to roar back to life. It is going to creep out of this hole,'' said David Wyss, chief economist at Standard & Poor's Co. in New York.
The Fed rate cut on Tuesday was the second consecutive quarter-point move after five straight half-point reductions, which had marked the most aggressive Fed credit easing since early 1982.
In explaining the decision, the Fed said it remained concerned that ``business profits and capital spending continue to weaken and growth abroad is slowing.''
However, the central bank struck a more positive tone by noting that ``household demand has been sustained.'' In June, it had worried that consumer demand, which accounts for two-thirds of total economic activity, was weakening.
Analysts said that this more upbeat view probably signaled that the Fed did not think it would have to do much more to assure a sustained economic rebound.
``The Fed is saying that the economy is poised for a rebound by the end of the year,'' said Martin Regalia, chief economist at the U.S. Chamber of Commerce.
Bruce Steinberg, chief economist at Merrill Lynch, said the Fed's lower interest rates likely would translate into $50 billion in savings on consumers' borrowing costs, which will help boost growth, especially when combined with nearly $40 billion in tax rebate checks.
The Bush administration is also predicting that the economy is about to turn the corner. In its new budget outlook, it predicts growth will return to 3.2 percent next year.
Looking to the future, the Fed said it still saw the risk weighted toward economic weakness, a signal that it was prepared to cut rates further.
While many analysts predicted the Fed would deliver another quarter-point rate cut on Oct. 2 as an insurance policy, some economists said the August cut may turn out to be the final move, especially if consumer spending shows a significant rebound in coming weeks.
``If spending does improve, as seems likely, the Fed may actually leave policy unchanged in October,'' said Mark Vitner, an economist at First Union in Charlotte, N.C.
But Jerry Jasinowski, president of the National Association of Manufacturers, said the central bank needed to keep in mind the hard-hit manufacturing sector, which has seen the loss of 837,000 jobs since the U.S. slowdown began a year ago.
``Clear signs of a recovery have yet to appear,'' he said, warning that with the spreading economic weakness overseas, U.S. manufacturers continued to face ``challenges both at home and abroad.''