Economists predict another interest rate cut
Thursday, April 19th 2001, 12:00 am
By: News On 6
WASHINGTON (AP) _ The Federal Reserve's latest sneak attack against recession probably won't be the last.
Economists predict another interest rate cut is likely next month to help the ailing economy, a view underscored by comments Thursday from the Fed's vice chairman that it is unclear how much further interest rates will need to fall to jump-start economic growth.
Roger Ferguson, who holds the No. 2 position at the Federal Reserve Board, said in a speech in Washington, ``It is too early to have a strong conviction that the economy is reaching the end of this period of quite slow growth.''
Commenting on the central bank's fourth rate cut this year, delivered Wednesday, Ferguson noted Fed policy-makers had said in their statement that the risks to the economy remain weighted toward economic weakens.
``What interest rates will be associated with a return to healthy growth in spending remains an open question,'' Ferguson said in his speech to the National Economists Club.
Many private economists believe that spending by both consumers and businesses, the main engine of economic growth, could remain lackluster for some time to come.
That, along with prospects of continued stock market volatility, rising unemployment and a weak manufacturing sector, points to a fragile economy in need of more bolstering, private analysts said in predicting further rate cuts.
``I think this spring and summer will be very tough for the economy,'' said Mark Zandi, chief economist at Economy.com, a consulting firm. ``I am hopeful the economy will make its way through without a full-blown recession.''
The central bank's one-half percentage point rate cut Wednesday was the fourth this year and the second outside a regularly scheduled Fed meeting.
Wall Street, which had given up hope that the Fed would cut rates again before its meeting May 15, soared on the news, with the Dow Jones industrial average on Wednesday enjoying its third biggest one-day point gain, 398.91 points.
Stocks on Thursday seesawed between positive and slightly negative territory as Wednesday's huge run-up brought out profit-takers.
As a rough rule of thumb, it takes at least six to nine months for the Fed's interest-rate reductions to make their way through the economy.
With Wednesday's rate cut, the Fed has now more than reversed a string of six rate increases from June 1999 through May of last year which it engineered in an effort to slow the economy and keep inflation at bay. When the Fed started raising rates in June 1999, the federal funds target stood at 4.75 percent, a quarter-point higher than it is currently.
Given that the first rate cut this year came on Jan. 3, the fourth quarter is the soonest it would show up in economic activity, said Merrill Lynch's chief economist Bruce Steinberg.
``If the economy has avoided falling into recession, then a strong rebound could begin by late this year or early next as monetary easing works its effect,'' he said.
Many economists believe the next rate cut will occur at the Fed's regular May 15 meeting, but they weren't certain whether it would be another half-percentage point or a quarter-point reduction. The size of the cut will depend on what upcoming economic data says about the economy's health, analysts said.
In its statement, the Fed said risks to the economy remained weighted mainly toward economic weakness rather than inflation, and analysts took that language to signal further rate cuts were likely.
Even if the Fed lowers rates again on May 15, there could be additional rate reductions after that.
``The authorities would continue easing if financial conditions do not improve sufficiently to make an economic rebound likely later this year,'' said Robert DiClemente, managing director of economic and market analysis for Salomon Smith Barney.
The Fed's rate cut Wednesday lowered the federal funds rate, the interest that banks charge each other, to 4.5 percent.
Commercial banks immediately followed suit with a half-point cut in their prime lending rate, pushing the benchmark for many consumer and business loans down to 7.5 percent, the lowest level in more than six years.