Fed Expected To Cut Rates Today

Tuesday, January 30th 2001, 12:00 am
By: News On 6

WASHINGTON (AP) — The Federal Reserve, trying to prevent the weakening economy from slipping into a recession, is prepared to aggressively cut interest rates to rejuvenate economic growth.

The extent of the slowdown was underscored with a report Wednesday that the economy grew at an annual rate of just 1.4 percent in the fourth quarter, the weakest showing in more than five years.

Fed Chairman Alan Greenspan told Congress last week that economic growth is probably ``very close to zero'' in the current quarter. His comments bolstered economists' views that the Fed's rate cut on Jan. 3 would be followed with several more.

The Commerce Department said Wednesday that the slowdown in the gross domestic product was caused by weakness in consumer spending and a 1.5 percent rate of decrease in business investment, the biggest decline since 1991, when the economy was pulling out of its last recession.

Even before the GDP came out, the slowdown has been documented in a spate of troubling economic reports. Manufacturers are struggling, consumers are considerably less confident in the economy and companies are laying off thousands of workers in response to slackened demand.

Against this backdrop, many private economists and Wall Street analysts are predicting the Fed's chief policy-making group, the Federal Open Market Committee, will cut short-term interest rates by a bold half percentage point at the end of its two-day meeting Wednesday afternoon.

The committee is composed of Fed board members in Washington, including Greenspan, and presidents of the Fed's regional banks.

``The degree of weakness in the economy and sagging consumer confidence will cause Greenspan to push for a (half-point) reduction,'' said Tim O'Neill, chief economist for Harris Bank.

Driven down by growing fears of a recession, consumer confidence fell sharply in January, plunging to its lowest level in four years, an industry group reported Tuesday.

The Consumer Confidence Index dropped more than 14 points to 114.4, the lowest level since December 1996 when it was 114.2, the Conference Board said in New York.

Given that, a half-point rate cut ``now looks like a slam dunk and more cuts will follow,'' said First Union economist Mark Vitner.

Testifying before the Senate Budget Committee last week, Greenspan didn't rule out a recession, saying that would depend on whether the economy's ``marked decline breaches consumer confidence.''

Greenspan gave a bleak assessment of current economic conditions, saying, ``As far as we can judge, we have had a very dramatic slowing down and, indeed, we are probably very close to zero (growth) at this particular moment.''

The big question is whether Fed rate cuts will be enough to avert a recession, analysts said.

A half-point reduction would lower the federal funds rate, the interest banks charge each other, from 6 percent to 5.5 percent.

In coming months, economists predict, the funds rate will drop to 5 percent in a series of rate-cutting moves by May or June. Fed policy-makers could decide to push the funds rate even lower, depending on how the economy unfolds, economists said.

By lowering borrowing costs, the Fed aims to spur business investment and consumer spending, which would in turn boost economic growth.

Economists said the Fed has a lot of flexibility in cutting rates because inflation remains tame, except for a burst of higher energy prices.

As Fed members met behind closed doors Tuesday, President Bush ducked a question at the White House about whether the central bank should cut interest rates, saying he had made a mistake when he expressed approval of the Fed's Jan. 3 rate cut.

``That's the last time I'm going to comment about the actions Mr. Greenspan takes. He's an independent voice and needs to be an independent voice,'' Bush told reporters.

If the Fed cuts rates by another half-point Wednesday, it's likely to be followed by a similar cut in commercial banks' prime lending rate, the benchmark for millions of personal and business loans, standing now at 9 percent.


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