Fed Signals It's Ready To Intervene

Wednesday, March 21st 2001, 12:00 am
By: News On 6

WASHINGTON (AP) — The Federal Reserve is sending a strong signal that it stands ready to do whatever is necessary to keep the economy from falling into recession. That could include another interest rate cut before the Fed's next meeting in two months.

The prospects of future rate cuts gave no comfort to investors on Wall Street. The market suffered a huge drop immediately after the announcement on Tuesday because investors were hoping for a bigger, three-quarter rate cut. And, the market opened lower on Wednesday. The Dow Jones industrial average was down 140 points and the Nasdaq was roughly flat in the first half hour of trading.

Fed Chairman Alan Greenspan and his colleagues slashed a key interest rate again Tuesday, the third half-point reduction this year, in an effort to keep the ailing economy afloat.

In doing so, the Fed worried about ``substantial risks'' of prolonged economic weakness. Specifically it said production cuts by manufacturers could continue for some time and that weak economies around the world could become a further drag on U.S. growth.

Economists believe the remarks hinted at the possibility of a fourth interest rate cut before the Fed's next scheduled meeting May 15, perhaps in a few weeks.

``The statement not only left the door open for another intermeeting rate cut, it almost seemed to anticipate the need for one,'' said David Orr, chief economist at First Union.

Mark Zandi, chief economist with Economy.com, believes the economy needs another booster shot before May. ``There's no way they can wait eight weeks to move,'' he said. ``I fully anticipate an intermeeting rate cut.''

With inflation posing little risks to the economy at the moment, the central bank has plenty of room to cut interest rates again, analysts said. A government report Wednesday showed that consumer prices moderated in February, rising by 0.3 percent, half the size of the big 0.6 percent gain posted in January. Still, February's rise was slightly bigger than the 0.2 percent increase many analysts expected.

Fed policy-makers pledged to keep a close eye on the economy between now and then. ``In these circumstances, when the economic situation could be evolving rapidly, the Federal Reserve will need to monitor developments closely,'' the statement said.

The Fed's latest half-point cut lowered the target for the federal funds rate, the interest that banks charge each other, to 5 percent, after half-point cuts on Jan. 3 and Jan. 31.

The 1.50-percentage-point cuts since the beginning of the year marked the Fed's most aggressive rate-reduction effort in 16 years, since the Fed under Paul Volcker as chairman slashed rates by 1.75 percentage points in the last two months of 1984.

Still, it will take a while for the rates cuts to work their way through the economy and show up as economic activity. That process can take up to a year, analysts said.

Many economists forecast the funds rate will be cut as many as three more times by the summer, dropping it to 4 percent. The Fed often moves in quarter-point increments.

The half-point cut Tuesday was followed immediately by announcements from banks around the country of reductions of a corresponding half-point in prime lending rates, benchmarks for millions of consumer and business loans, to 8 percent, the lowest the prime rate has been since August 1999.

That means different types of loans that are linked to the prime will see rates go down, such as some auto loans, home equity loans, credit cards, student loans and short-term business loans.

With lower borrowing costs, people and businesses might feel more inclined to spend and invest, something that would eventually boost economic growth.

Moreover, ``with less of households' paychecks going to service debt, people will have extra money to spend,'' said Paul Taylor, chief economist for the National Automobile Dealers Association. ``Lower rates also will spur more refinancing, which also will leave households money to spend on other things.''

Still, economists believe the real psychological boost to consumers, who account for two-thirds of all economic activity, may not be so much lower interest rates but the effect the Fed's action has on the stock market.

Wall Street has been suffering through a huge sell-off. The Dow Jones industrial average last week had its biggest weekly drop in 11 years.

On Tuesday, the Dow, which had been trading around the 10,000 level at the time of the Fed's mid-afternoon announcement, fell 238.35 to 9,720.76, its lowest close in two years. The Dow has now lost 1,137.49 over the past eight trading sessions and is down 17 percent from its record high in January 2000.

If paper losses make consumers feel a lot less wealthy, they might stop spending and send the economy into a recession, economists said.