Greenspan takes another whack at federal interest rates
April 18, 2001
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.
One of the main engines of economic growth in the past has been robust spending by consumers and businesses, something economists believe will remain lackluster for a while longer.
That, along with prospects of continued stock market volatility, rising unemployment and a weak manufacturing sector, point to a fragile economy in need of more bolstering, analysts said.
“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 marked 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 on May 15, soared on the news with the Dow Jones industrial average enjoying its third biggest one-day point gain on Thursday, an increase of 398.91 point.
Stocks in late morning trading Thursday were still higher, with the Dow gaining an additional 28 points, recouping from earlier profit-taking.
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.