The nation did not have to wait long for an official explanation why the Federal Reserve Board lowered its key interest rate this week. One day after cutting the federal funds rate to 5.5 percent, the ninth cut since last October's 8 percent high, the Fed described economic conditions as "spotty, uneven." It found retail sales declining in its Richmond Reserve District, which includes Maryland, and cited continuing layoffs by state and local governments, weak demand for business loans, home sales losing momentum and commercial real estate and construction activities weak. The central bank is clearly worried about a double-dip recession.
Such gloom in the Fed's monthly "beige report" is likely to stimulate stock and bond markets in anticipation of further cuts in interest rates. While this may be good news for shareholders and coupon-clippers, it is hardly reassuring to those who have confidently been predicting the recession has bottomed out and is on the way to recovery.
One factor -- and it is a good factor -- that has encouraged boldness at the Fed is solid evidence inflation is under control, at 4 percent, and may even drop to 3.5 percent. Given such conditions, the central bank can put aside its usual fears of rising prices. Thus its sudden increase in the money supply, which is its principal mechanism for reducing the federal funds rates banks charge one another.