END expected soon in string of interest rate cuts

Thursday, July 5th 2001, 12:00 am
By: News On 6

WASHINGTON (AP) _ The Federal Reserve's latest recession-fighting campaign could be drawing to a close as policy-makers monitor whether their six interest-rate reductions and Congress' tax-cut refunds will revive the sagging economy.

With Wednesday's quarter-point cut, Fed Chairman Alan Greenspan and his colleagues have slashed interest rates by a total of 2.75 percentage points this year, the most aggressive action in nearly two decades.

Economists are hopeful that those reductions will lay the foundation for an economic rebound by the fourth quarter of this year.

``At some point, after a farmer tills the soil, fertilizes and sows the seeds, he must just sit back and watch what comes up,'' said economist Ken Mayland, president of ClearView Economics.

The arrival, beginning next month, of tax rebate checks of up to $600 also are expected to lift the economy _ provided people spend some of the money as analysts predict. The checks are part of a $1.35 trillion tax cut recently signed by President Bush.

After being unmoved by the Fed's action on Wednesday, Wall Street investors decided Thursday that the quarter-point cut, though smaller than what they hoped for, was a good enough reason to rally. The Dow Jones industrial average soared more than 200 points at midday, helped along by news that a federal appeals court reversed the break-up of software giant Microsoft.

Until Wednesday, all of the Fed's previous rate reductions this year were by a half-point. Economists viewed the Fed's decision to go with a more moderate quarter-point move as a signal that the central bank's aggressive credit easing may be coming to an end.

``I think they are winding it down,'' said Stuart Hoffman, chief economist at PNC Financial Services Group.

Hoffman and other economists predict that the last reduction is likely to come at the Fed's meeting on Aug. 21 and that it will be by another quarter-point. Some analysts believe policy-makers might opt to cut again at their Oct. 2 meeting and then move to the sidelines. A few think Wednesday's cut could be the final one.

``The prospects for improvement are very good,'' said Martin Regalia, chief economist at the U.S. Chamber of Commerce. ``The Fed has put this stimulus in the pipeline. We have tax cuts. It's time to wait and see. People just have to have a little bit of faith that this is going to work.''

As a rough rule of thumb, the Fed's interest-rate cuts take between six and nine months to make their way through the economy. Its first rate cut was on Jan. 3, so that reduction wouldn't show up in economic activity until July at the earliest.

The Fed's credit-easing campaign is aimed at reviving the national economy, which has been stuck in low gear since the second half of last year. The rate cuts lower borrowing costs, a move designed to entice consumers to spend and businesses to invest, thus bolstering economic growth.

The Fed provided no explanation why it switched to a smaller cut, other than citing that ``continuing favorable trends bolster long-term prospects for productivity growth and the economy.''

However, economists suggested that the quarter-point cut might have been a compromise between Fed officials concerned about overdoing the credit easing and sowing the seeds of higher inflation next year and those still worried the economy could tip into recession.

Wednesday's cut pushed the Fed's target for the federal funds rate, the interest that banks charge each other, to 3.75 percent, down from 6.5 percent where it stood before the Fed began cutting rates on Jan. 3.

The Fed action was immediately followed by a quarter-point cut in commercial banks' prime lending rate, sending the benchmark for millions of business and consumer loans down to 6.75 percent, the lowest level in seven years.

Many economists believe the economy has grown at a barely discernible 0.5 percent annual rate in the April-June quarter, down from the weak 1.3 percent rate of the first quarter. But they are forecasting slightly stronger growth of around 2 percent in the third quarter, rising to above 3 percent in the fourth quarter.

In making its sixth rate cut, the Fed, in a statement, discussed threats to future economic growth. ``The patterns evident in recent months _ declining profitability and business capital spending, weak expansion of consumption and slowing growth abroad _ continue to weigh on the economy,'' the Fed said.

One point economists agree on is the belief that the Fed, which left the door open to further interest-rate reductions, will do all that is necessary to keep the economy afloat.

``They remain on high alert,'' said Mark Zandi, chief economist at Economy.com.