World Waits for Federal Reserve to Consider Another Rate )) Cut

May 17, 1992|By GILBERT A. LEWTHWAITE | GILBERT A. LEWTHWAITE,Gilbert Lewthwaite writes about economic issues from The Sun's Washington bureau.

WASHINGTON — Washington. -- Will they? Won't they? It's the best guessing game in town.

When the sober-suited officers of the Federal Reserve meet in their elegant conference room here tomorrow and Tuesday, the financial world will be holding its breath.

The central bankers of the most powerful economy will decide whether or not to reduce interest rates again to prime the pump of economic recovery. It is a decision that will reverberate around the globe, affecting markets, altering expectations.

They have economic room to ease the rates. But do they have the need?

It is their judgment call, and a difficult one with the recovery sending so many mixed signals about its strength. The only certainty at the moment is that the recovery will remain weaker than normal, if it doesn't falter.

The U.S. economy has bounced back from previous post-World War II recessions with an energetic 6 percent annual growth in gross domestic product, the total of all goods and services produced in the country. This time it is struggling to reach half that rate.

The Fed has already intervened several times since last autumn. The question remains: has it done enough?

It will take the recommendation of only one of the Fed's 12 regional banks to put a reduction in the discount rate -- the rate charged on loans made by the Reserve Banks -- to a vote of its governors. A majority of those sitting at the table will be needed ++ to act. They meet formally Monday, but could make the decision any time.

Any move to lower the funds rate -- the rate at which banks borrow surplus reserves from each other -- will come from the Federal Open Market Committee, which oversees day-to-day execution of monetary policy. It meets Tuesday.

The funds rate is generally seen as the likeliest mechanism for any new spur to the economy. A quarter percentage reduction of the current 3.75 percent rate could produce up to a half percentage drop in the prime rate, spurring companies and consumers into a more vigorous round of borrowing and spending.

If they engineered a reduction, the Fed officials would also hope it would bring long-term rates down. These are the rates that affect mortgage interest payments, and lowering them is crucial to energizing the housing market, a crucial sector for any robust recovery.

"I think we have a new, improved, quick-acting Fed this year, as apposed to last year," says Roger Brinner, chief economist with DRI McGraw-Hill.

"Last year we had to wait many months [for Fed action] until the economy was deeply in trouble. This year, if we get any piece of bad news now, they will act promptly."

Cynthia Glassman, a former Federal Reserve economist and currently director of research at Furash and Co., a Washington D.C. financial consulting company, said: "There is a balance between wanting to keep inflation down and wanting to promote growth. In the last couple of years they were somewhat more sensitive to inflation concerns.

"Now with several years of recession behind them and relatively low growth forecast, I think they are most sensitive to the growth side of that equation."

It is beyond argument that last year the Fed was slow to recognize recession, tardy in responding, and reluctant to acknowledge the length and breadth of the nation's economic plight.

After cutting the discount rate from 6 percent to 5.5 percent on April 30, the Fed sat on its hands for five months while nascent recovery turned into double-dip downturn, workers lost their jobs and consumer confidence plummeted.

Not until September 13 did the Fed ease the rate further from 5.5 percent to 5.0 percent. The result: virtually zilch. Another pause until November 6 when it took another half percentage point off. Again, no good.

Then, just before Christmas, on December 20 it delivered a full point reduction to 3.5 percent, and things started to happen. The first real signs of recovery began to emerge. In the first quarter the economy, as measured by gross domestic product, grew at an annual rate of 2 percent, not great by historical recovery standards, but positive movement.

Retail sales shot up almost 5 percent in January and February as consumers went on a post-Christmas spending spree in unseasonably warm weather. It was a brief boom. The spending money soon ran out, leaving March retail sales down 1 percent, and April's just reviving by 0.9 percent.

The recovery is generally seen as likely to sputter on, gradually gaining some strength until it reaches a growth rate of 3 percent or 3.5 percent in the last two quarters of this year.

The Fed, disturbed by the lack of vitality in the recovery, moved in April to reduce the federal funds rate to its present level of around 3.75 percent, well below its 1991 average of 5.69 percent and the 1990 average level of 8.10 percent.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.