Fed Expected To Lower Rates Again

Jan. 13, 2005
By John S. McClenahen Alan Greenspan and his colleagues on the Federal Open Market Committee (FOMC) will drop the influential federal funds rate to 4.0% by midyear, expects Bruce Steinberg, chief economist at Merrill Lynch & Co., New York. And, ...
ByJohn S. McClenahen Alan Greenspan and his colleagues on the Federal Open Market Committee (FOMC) will drop the influential federal funds rate to 4.0% by midyear, expects Bruce Steinberg, chief economist at Merrill Lynch & Co., New York. And, Steinberg says, there's "a very real possibility that further easing will take place after that." With the federal funds rate now at 4.5%, the Fed has cut short-term interest rates by 2 percentage points (200 basis points) in four months, "its most aggressive action in 16 years," notes Steinberg. "Capital investment has continued to soften and the persistent erosion in current and expected profitability, in combination with rising uncertainty about the business outlook, seems poised to dampen capital spending going forward. This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, threatens to keep the pace of economic activity unacceptably week," said Greenspan and the other FOMC members in announcing yesterday's unexpected, between-scheduled-meetings cut in short-term interest rates. The National Assn. of Manufacturers (NAM), Washington, which for nearly a year has been aggressively pushing the Fed to lower interest rates, is predictably pleased with the action -- "much-needed adrenaline for a week economy," says NAM Chief Economist Gordon Richards. "The Fed has staved off a downward spiral and precluded any long period of stagnation," Richards believes. However, the impact of the Fed's action won't be instantaneous for most of the U.S. economy. There's typically a six- to nine-month lag, meaning that the major effects of yesterday's cut and those from the first quarter of 2001 probably won't be seen until sometime this fall at the earliest. "If the economy has avoided falling into recession, then a strong rebound could begin by late this year or early next [year] as monetary easing works its effect," says Merrill Lynch's Steinberg. "But if a recession has begun, a strong pickup would be delayed until this time next year . . . ." In the meantime, the FOMC is slated to meet again on May 15, June 26 and 27, and Aug. 21.

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